50 
-S 


MERCANTILE  CREDITS 

A  Practical  Study 
of  the  Credit  Man's  Work 


By 
FINLEY  H.  McADOW 

Credit  Manager,  Bilhuber-Wawak  Co.,  Chicago;  Past  President, 

National  Association  of  Credit  Men;  Lecturer  on  Credits  and 

Collections,  Northwestern  University  School  of  Commerce 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 
1922 


COPYRIGHT,  1922,  BY 
THE  -RONALD.  PRESS  COMPANY 

*  f : :?  'Jf&M&t*  Reserved 


o* 


Inscribed  to  the 

NATIONAL  ASSOCIATION 
OF  CREDIT  MEN 

BY  THE  AUTHOR 


50671)1 


PREFACE 

The  purpose  of  this  book  is  to  serve  as  a  means  for  a 
more  careful  study  of  some  of  the  problems  involved  in 
the  granting  of  mercantile  credits,  and  of  the  principles  to 
be  applied  in  the  solution  of  those  problems.  In  addition 
to  giving  this  direct  assistance,  it  is  hoped  that  the  book 
will  stimulate  and  encourage  a  more  careful  study  of  the 
credit  question  in  general. 

Now,  as  in  the  past,  men  come  into  the  credit  field 
without  previous  preparation  and  learn  mostly  by  experi- 
ence. Their  entrance  into  this  line  of  work  is  generally 
the  result  of  fortuitous  circumstances  rather  than  of  any 
purposeful  plan.  The  author  himself  became  a  credit 
man  in  this  haphazard  way,  passing  on  credits  having 
been  simply  added  in  the  course  of  time  to  his  other 
duties.  Notwithstanding  that  perhaps  the  majority  of 
credit  men  have  secured  their  training  in  some  such  way 
as  this,  this  method  of  training  credit  men  in  the  hard 
school  of  experience  is  not  only  laborious  to  the  men 
themselves,  but  unquestionably  also  expensive  to  the 
employing  firm,  as  during  the  years  in  which  experience 
is  being  gained  the  standard  of  efficiency  in  the  credit 
work  is  bound  to  be  lower  than  if  the  men  did  not  rely 
entirely  on  experience  but  supplemented  it  by  study. 

What  has  been  written  in  the  following  pages  may  help 
to  make  the  acquisition  of  some  of  this  knowledge  a  less 
arduous  task.  The  book  is  the  result  of  many  years' 
experience  at  the  credit  desk,  supplemented  by  an  extended 
study  of  the  subject  in  preparing  a  course  of  lectures 

v 


vi  PREFACE 

given  at  schools  of  commerce.  It  has  involved  careful 
consideration  of  what  has  been  written  by  many  other 
credit  men  on  various  aspects  of  credit  work,  and  ac- 
knowledgment is  hereby  expressed  for  the  considerable 
help  received  in  this  manner  from  fellow  credit  workers. 
The  book  is  designed  for  the  use  primarily  of  the 
younger  men  coming  into  credit  department  work.  It 
aims  to  impress  upon  them  the  importance  of  a  thorough 
study  of  their  chosen  field  of  labor.  It  may  also  possibly 
prove  a  helpful  text  for  students  pursuing  the  study  of 
credit  in  a  school  of  commerce. 

In  the  course  of  his  experience  it  has  been  the  author's 
good  fortune  to  have  observed  a  rather  extended  and 
varied  range  of  credit  work.  As  a  result  of  this  wide 
observation,  he  feels  that  the  importance  of  careful  study 
as  a  basis  for  success  in  credit-granting  cannot  be  over- 
emphasized. In  the  past,  the  necessity  of  a  thorough 
training  in  this  field  of  business  has  not  been  sufficiently 
recognized;  but  it  is  certain  that  the  importance  of  such 
training  will  be  felt  more  keenly  as  the  country's  com- 
merce continues  to  expand  and  the  resulting  competition 
forces  all  business  houses  to  adopt  the  best  methods  and  to 
strive  for  the  highest  efficiency  in  the  credit  as  well  as 
other  departments. 

FINLEY  H.  McADOW 
Chicago,  111., 

September  20,  1922. 


CONTENTS 


CHAPTER  PAGE 

I.  CREDIT  AND  THE  CREDIT  MAN 3 

II.  THE  CREDIT  RISK — THE  CUSTOMER 20 

III.  CHARACTER  AS  A  CREDIT  ASSET 31 

IV.  THE  CREDIT  DEPARTMENT  AND  THE  BUSINESS 40 

V.  THE  CREDIT   FILE — REPORTS  OF  SALESMEN    AND 

COMMERCIAL   AGENCIES 46 

VI.  OTHER  SOURCES  OF  CREDIT  INFORMATION 58 

VII.  THE  PROPERTY  STATEMENT 73 

VIII.  THE  PROPERTY  STATEMENT — Continued 85 

IX.  WHY  MEN  FAIL  IN  BUSINESS 103 

X.  COLLECTING  THE  ACCOUNTS no 

XI.  TRADE  ABUSES  OR  HUMAN  NATURE  IN  BUSINESS..  125 

XII.  THE  BANKRUPTCY  LAW   134 

XIII.  BY-PRODUCTS  IN  CREDIT-GRANTING. 151 

XIV.  BANKING  CREDITS 162 

XV.  RETAIL  AND  INSTALMENT  CREDITS 175 

XVI.  FOREIGN  CREDITS 185 


vii 


FORMS 

FIGURE  PAGE 

1.  Form   Used   by    Chicago    Credit   Interchange   Bureau   in 

Answering  a  Member's  Inquiry. .  .^ 66 

2.  Form  on  Which   Members  of   Chicago   Credit   Exchange 

Bureau  Make  Reports 66 

3.  Form  on  Which  Members  of  Lumbermen's  Credit  Asso- 

ciation Report  Inquiries  to  Bureau 68 

4.  Form  on  WTiich  Members  of  Lumbermen's  Credit  Asso- 

ciation Report  Trade  Experience  to  Bureau 69 

5.  Dun's  Form  of  Property  Statement 86 

6.  Form  of  Property  Statement  Used  by  Several  Commercial 

Houses 88 

7.  Credit  Brief ,,,,,, ,,,,,,,,,,,,,,,  Joi 


viii 


MERCANTILE  CREDITS 


CHAPTER  I 

CREDIT  AND  THE  CREDIT  MAN 

Wide  Use  of  Credit 

Credit,  as  the  term  is  generally  understood  in  the 
commercial  world  today,  may  be  briefly  defined  some- 
what as  follows : 

Credit  is  parting  with  the  possession  of  money  or  chattels  in 
the  present,  on  the  promise  of  the  person  receiving  the  property 
to  pay  for  the  goods,  or  repay  the  money,  at  an  agreed  future 
time;  and  on  the  belief  that  the  person  obtaining  the  property  so 
transferred  will  be  both  able  and  willing  to  meet  the  obligation 
thus  created  at  its  maturity.1 

The  function  of  credit  in  commerce  is  to  supplement 
or  act  as  a  substitute  for  capital.  Students  of  economic 
subjects  are  agreed  that  credit  is  not  wealth,  but  that  it 
is  an  aid  in  producing  wealth.  In  this  country  the  actual 
money  in  circulation  (end  of  July,  1922)  is  $4,375,555,000 
for  over  110,000,000  people,  or  $39.87  per  capita.  One 
can  very  easily  imagine  the  limitation  on  our  commerce  if 
all  transactions  were  on  a  cash  basis.  Credit,  therefore, 
supplements  the  actual  money  used  in  business  many  fold. 

Thus  the  importance  of  credit  as  an  agency  in  the  con- 
duct of  modern  business  is  almost  beyond  estimate.  For 
the  year  1919  the  total  volume  of  American  business,  in- 
cluding both  domestic  and  foreign  trade,  and  taking  in  the 


1  Anyone  desiring  to  give  more  study  to  the  matter  of  definition,  will  be 
interested  in  a  discussion  of  the  subject  by  W.  A.  Prendergast  in  his  "Credit 
and  Its  Uses,"  and  the  quotations  he  submits  from  well-known  writers  on 
various  economic  questions. 

3 


4  MERCANTII E  CREDITS 

total  of  bank  clearings,  amounted  to  nearly  five  hundred 
billions  of  dollars,  after  allowing  for  overlapping  of  re- 
sales and  clearings.  While  it  is  difficult  to  obtain  ac- 
curate or  complete  data  in  this  matter,  it  will  not  be  ex- 
travagant to  say  that  95  per  cent  of  this  huge  total  was 
done  by  some  form  of  credit  and  credit  instrument.  The 
great  bulk  of  the  credit  involved,  moreover,  consisted  of 
commercial  credits  passed  upon  and  created  by  credit 
men  in  mercantile,  banking,  and  manufacturing  lines. 

Origin  of  the  Credit  Department 

The  development  of  the  credit  man  and  of  the  work 
which  he  performs  is  a  result  of  the  phenomenal  growth 
of  the  commerce  of  our  country  in  the  last  thirty  years 
or  so.  By  the  year  1880  the  nation  had  completed  the 
adjustment  of  financial  and  commercial  problems  and  con- 
ditions growing  out  of  the  Civil  War,  and  had  recovered 
from  the  business  depression  of  1873.  The  effect  of  an 
extraordinary  extension  of  railways,  an  unusual  influx  of 
immigrants,  and  the  opening  up  of  the  "boundless  West," 
increased  the  volume  of  business  at  a  rate  unequaled  in 
any  other  equal  period  in  our  history.  Up  to  that  time 
the  proprietor  or  head  of  a  firm  had  been  the  dispenser  of 
and  the  sole  authority  on  credit-granting.  The  sudden 
growth  or  increase  in  volume  experienced  by  all  com- 
mercial houses  overtook  his  ability  to  carry  this  task, 
especially  when  it  became  impossible  for  him  to  meet  his 
customers,  or  only  a  very  small  percentage  of  them,  for 
a  personal  interview.  His  time  was  now  taken  up  by 
executive  duties  pertaining  to  the  growth  of  the  business, 
to  the  larger  questions  of  handling  the  increasing  volume, 
and  to  determining  the  policies  to  be  followed  in  dealing 
with  the  rapidly  changing  conditions.  The  traveling  sales- 
man had  come  into  the  field,  and  he  was  usually  the  only 


CREDIT  AND  THE  CREDIT  MAN        5 

representative  of  the  firm  who  met  the  customer  face  to 
face. 

When  the  proprietor  had  to  call  other  men  to  his  aid 
in  different  departments  of  the  business,  and  when  what 
we  now  call  "organization"  began,  he  had  to  let  go  of 
credits  as  one  of  the  first  results  of  the  change.  As  a  rule 
he  gave  up  that  part  of  his  duties  with  reluctance  and 
misgiving.  He  had  accumulated  his  knowledge  of  credit- 
granting  through  years  of  experience,  hard  knocks,  and 
personal  acquaintance  with  customers.  Only  the  sternest 
necessity  induced  him  to  turn  over  this  important  duty  to 
any  less  experienced  man.  As  the  least  risky  way  of 
meeting  the  emergency  he  usually  drafted  the  bookkeeper 
for  the  duty,  trying  to  keep  in  touch  with  the  work,  and 
giving  counsel  as  he  had  opportunity.  The  bookkeeper, 
however,  could  not  handle  both  accounting  and  credits, 
and  the  work  was  soon  placed  in  the  hands  of  a  special 
man.  In  this  manner  the  "credit  man"  came  into  the 
organization.  He,  like  his  predecessor,  received  his  train- 
ing also  in  the  school  of  experience.  The  duties  he  was 
obliged  to  assume  with  so  little  preparation  defined  clearly 
the  importance  of  his  position. 

Importance  of  Credits  as  a  Study 

The  study  of  mercantile  credits  received  a  great  im- 
petus at  the  Congress  of  Nations  held  in  connection  with 
the  World's  Fair  in  Chicago  in  1893.  A  call  was  issued 
for  a  parliament  on  this  subject  in  connection  with  the 
Congress,  and  the  following  three  questions  were  pro- 
posed for  discussion. 

1.  How  can  we  raise  the  standard  of  credit,  reduce  its  dangers 
and  losses,  and  at  the  same  time  extend  and  increase  its  usefulness 
to  ourselves  and  others? 

2.  How  can  the  quality  of  information  concerning  debtors,  and 
the  present  facilities  for  obtaining  it,  be  improved? 


6  MERCANTILE  CREDITS 

3.  Would  it  be  practicable  through  co-operation  to  establish  a 
standard  of  requirements  for  a  credit  basis? 

National  Association  of  Credit  Men 

As  a  result  of  the  discussions  in  the  Congress  a  com- 
mittee was  appointed  to  bring  about  a  national  organiza- 
tion of  those  interested  in  the  subject,  and  in  1896  the 
National  Association  of  Credit  Men  was  organized.  No 
discussion  of  mercantile  credits  would  be  complete  without 
a  recognition  of  the  great  work  that  has  been  accom- 
plished by  this  organization,  and  its  140  or  more  affiliated 
local  associations.  It  has  had  a  strong  influence  in  sub- 
stituting co-operation  for  competition  in  the  domain  of 
commerce.  The  old  dogma  was  "Competition  is  the  life 
of  trade."  The  new  creed  is  "Co-operation  is  the  more 
abundant  life  of  commerce."  Perhaps  its  first  and 
greatest  reform  in  business  was  to  establish  the  inter- 
change of  ledger  experience.  In  accomplishing  this  it  was 
necessary  to  "break  down  the  middle  wall  of  partition"  on 
prejudice,  which  up  to  that  time  had  made  any  merchant 
unwilling  to  give  information  concerning  one  of  his  cus- 
tomers to  another  house,  and  particularly  when  that  other 
house  was  a  competitor. 

Legislative  Reforms 

The  enactment  of  bulk  sales  laws  in  all  the  48  states,  of 
bad  check  laws,  and  of  laws  to  punish  the  making  of  false 
statements  for  obtaining  credit,  the  establishment  and 
maintenance  of  interchange  bureaus,  and  of  bureaus  for 
investigation  and  prosecution  of  frauds,  are  among  the 
achievements  of  the  association  in  legislation  and  other 
fields  of  reform.  In  securing  legislative  enactments  this 
association  has  been  actuated  solely  by  a  spirit  of  the 
most  self-sacrificing  altruism.  It  has  won  and  held  the 


CREDIT  AND  THE  CREDIT  MAN        7 

respect  and  confidence  of  every  legislative  body  from 
which  it  has  sought  aid  in  securing  these  reform  measures. 

The  literature  which  it  has  issued,  giving  information 
on  every  branch  of  credit  work,  has  been  an  unmeasured 
but  powerful  force  in  the  education  and  development  of 
credit  men ;  and  it  has  welded  the  credit  men  of  the  nation 
into  a  brotherhood  of  earnest  advocates  for  the  improve- 
ment of  business  conditions  and  the  elevation  of  the 
standards  of  business  ethics  and  ideals.  Including  the 
officers,  directors,  and  committee  members  of  the  national 
association,  and  the  corresponding  units  for  each  of  the 
local  associations,  there  are  approximately  4,000  active 
credit  men,  who  year  in  and  year  out  work  tirelessly  and 
zealously  for  the  improvement  of  credit  conditions. 

The  men  who  joined  the  organization  at  Toledo  in 
1896  as  charter  members  like  to  be  spoken  of  as  the  "Old 
Guard/'  and  those  who  yet  survive  take  as  great  pride 
in  this  honorable  distinction  as  did  the  signers  of  the 
Declaration  of  Independence  in  their  day.  The  growth 
of  membership  from  the  600  of  1896  to  the  nearly  35,000 
of  today  attests  the  great  value  of  the  organization. 

The  need  for  intensive  training  is  greater  than  ever 
before,  but  the  beginner  in  the  credit  department  today  is 
finding  within  his  reach  constantly  increasing  facilities 
for  training  which  were  not  accessible  to  credit  men 
twenty  or  thirty  years  ago. 

Qualifications  of  Credit  Man — Knowledge  of  Busi- 
ness Conditions 

To  succeed  as  a  credit  manager  calls  for  careful  and 
systematic  training,  which  must  be  largely  self -training. 
The  man  in  this  position  should  have  a  general  and  some- 
what accurate  knowledge  not  only  of  business  methods, 
but  also  of  general  business  conditions. 


8  MERCANTILE  CREDITS 

For  opening  an  account  with  a  new  customer — a  mer- 
chant seeking  credit — the  credit  man  will  be  able  to 
exercise  a  more  accurate  judgment  if  he  knows  the  crop 
situation  and  all  other  conditions  which  will  affect  the 
purchasing  and  paying  power  of  the  people  of  that  ter- 
ritory or  vicinity  with  which  the  merchant  must  deal.  It 
may  be  a  manufacturing  or  mining  district.  If  so,  is  the 
general  tendency  in  these  industries  towards  prosperous 
times?  Or  is  a  strike  imminent?  Or  is  it  likely  that 
the  mines  may  close  down? 

If  it  is  chiefly  a  farming  community  on  which  the 
merchant  seeking  the  credit  must  depend  for  his  patron- 
age, what  is  the  crop  condition  there,  both  as  to  the  vol- 
ume of  production  and  the  price  at  which  it  must  be 
marketed?  Is  the  territory  well  populated?  What  are 
the  land  values?  Are  the  farms  operated  by  the  owners 
of  the  land,  or  chiefly  by  renters?  All  these  things  will 
make  a  difference  in  the  amount  the  people  in  that  com- 
munity will  be  willing  to  buy  and  be  able  to  pay  for. 
They  are  points  on  which  the  credit  man  must  be  in- 
formed if  he  is  to  judge  accurately  whether  a  prospective 
customer  will  have  a  reasonable  chance  to  sell  the  mer- 
chandise he  is  proposing  to  buy  and  turn  it  into  cash 
with  which  to  meet  his  obligations  at  maturity. 

Need  of  Studying  Economics 

The  successful  dispenser  of  credits  in  fact  should  be 
a  careful  student  of  economics  as  applied  to  the  work  of 
his  department.  This  will  involve  systematic  reading  and 
close  application  and  study;  and  it  will  be  worth  the  cost 
in  what  it  will  add  to  his  fund  of  knowledge.  It  will 
require  not  only  a  daily  glance  at  the  financial  pages  of 
the  daily  newspaper,  but  also  a  study  of  the  weekly  re- 
views of  business  conditions  by  the  mercantile  agencies, 


CREDIT  AND  THE  CREDIT  MAN  9 

and  of  reports  from  organizations  which  seek  to  fore- 
cast the  trade  outlook.  Will  it  be  a  buyer's  market  or  a 
seller's  market  for  the  next  few  months?  Will  there  be 
lower  prices  on  farm  products  or  a  steady  market?  If 
the  credit  man  can  establish  confidential  relations  with 
the  firm's  banker,  he  can  learn  whether  a  tight  money 
market  is  impending  or  whether  the  outlook  is  for  a 
plentiful  supply  of  loanable  funds,  for  bankers  make  it  a 
practice  to  look  ahead  about  six  months,  and  they  are 
usually  good  credit  advisers.  All  the  above  conditions 
have  their  effect  on  credits  and  collections,  and  they  vary 
for  different  sections  of  the  country. 

The  1920  Readjustment 

No  period  in  our  commercial  history  drove  home  with 
more  telling  effect  the  need  of  studying  business  condi- 
tions than  did  the  readjustment  experiences  of  1920. 
Economic  writers  had  been  foretelling  with  earnestness 
and  emphasis  the  price  reduction  that  must  come — that 
the  initial  symptom  would  be  a  falling  off  in  retail  demand 
and  a  consequent  decline  in  prices  to  the  consumer.  The 
price  advance  had  started  at  the  point  of  production, 
reaching,  in  order,  the  jobber  or  middleman,  the  retailer, 
and  the  consumer.  The  trend  downward  would  be  in 
the  reverse  of  this  order.  It  had  been  announced  that  the 
government  would  hold  on  to  its  excess  of  war  supplies 
and  merchandise,  lest  placing  them  on  the  market  might 
make  the  price  decline  come  too  suddenly.  The  problem 
was  to  ease  down  gradually  so  that  the  readjustment 
might  not  come  as  an  avalanche.  Credit  men  were 
warned  that  the  shrinkage  in  inventories  which  must  fol- 
low this  unavoidable  reduction  in  prices  would  put  a 
strain  on  merchants  which  many  of  them  might  not  be 
able  to  withstand,  and  the  problem  with  every  credit  man 


io  MERCANTILE  CREDITS 

was  to  put  into  his  daily  work  the  practical  application  of 
credit  contraction  which  was  the  only  sure  safeguard. 
The  credit  dispensers  who  most  quickly  foresaw  and 
guarded  against  the  coming  change  in  conditions  suffered 
the  least.  They  not  only  studied  the  situation  carefully 
from  day  to  day,  but  they  applied  and  made  sensible  use 
of  the  results  of  their  study  in  their  daily  work. 

Benefits  of  Self-Training 

The  credit  manager  should  ask  for,  and  will  usually 
find  his  firm  very  willing  to  grant,  the  opportunity  to 
study  all  published  matter  coming  to  the  office  which  has 
a  bearing  on  credit  subjects.  He  can  thus  train  himself 
to  exercise  keenness  of  insight  and  judgment,  and  to  de- 
velop highly  the  power  of  analysis.  In  handling  the  con- 
crete cases  that  come  before  him  he  must  learn  to  reason 
from  cause  to  effect,  and  to  recognize  the  fact  that  certain 
causes  will,  with  reasonable  certainty,  always  produce  the 
same  effects  or  results.  In  this  phase  of  his  work  ac- 
cumulated experience  will  be  a  constant  corrective  of  his 
judgment. 

Good  Judgment  Necessary 

To  illustrate,  one  matter  which  must  always  be 
watched  closely  is  overbuying,  for  this  will  almost  in- 
variably get  the  customer  into  trouble.  Yet  this  tendency 
is  always  under  the  control  of  the  credit  man  and  the 
remedy  is  in  his  hands.  Wherever  there  is  overbuying, 
there  is  overselling.  The  problem  of  the  credit  man  is 
to  discover  this  danger  in  time  to  avoid  it. 

He  will  often  be  called  upon  to  make  immediate  de- 
cisions, with  time  for  only  a  very  limited  investigation. 
In  such  cases  trained  reasoning  faculties  and  the  ability 
to  make  accurate  analyses  of  facts  will  be  of  the  utmost 


CREDIT  AND  THE  CREDIT  MAN  n 

importance.  His  decisions  are  based  usually  on  a  variety 
of  information  accumulated  in  the  credit  file.  The  trained 
mind  separates  the  wheat  from  the  chaff,  recognizes  the 
really  material  facts  in  the  mass,  fits  them  together, 
giving  each  its  relative  value  or  importance,  and  then 
decides  whether  he  has  such  a  bird's-eye  view  of  the 
character,  financial  resources,  capacity,  and  surroundings 
of  the  applicant  for  credit,  who  may  reside  in  a  distant 
state,  as  will  warrant  him  in  extending  the  credit  and 
enable  him  to  determine  how  large  a  credit  may  be  safely 
given. 

A  Decision  that  Was  Wrong 

In  a  recent  bankruptcy  case  the  following  situation 
developed.  A  merchant  tailor  conceived  the  idea  that  he 
could  enter  the  manufacturing  field  and  establish  agencies 
throughout  the  country  to  which  he  would  sell  cloth  from 
samples.  All  orders  were  to  be  accompanied  by  cash  or 
shipped  C.  O.  D.  He  made  a  financial  statement  showing 
resources  of  about  $5,000,  and  as  he  would  do  all  business 
on  practically  a  cash  basis,  he  felt  that  this  was  ample 
capital.  He  secured  numerous  lines  of  credit,  because  of 
the  evident  soundness  of  his  proposition  and  because  of  a 
previous  record  for  promptness.  He  conducted  business 
on  this  plan  for  about  two  years  seemingly  with  success. 
Then  came  the  readjustment  of  prices  following  the 
World  War.  He  began  gradually  to  be  slow  in  payments, 
but  continued  to  use  his  lines  of  credit  to  the  limit.  None 
of  his  twenty  or  more  creditors  took  alarm  at  this  change 
in  conditions.  They  were  seemingly  lulled  into  a  feeling 
of  false  security  or  confidence  until  accounts  began  to  be 
from  three  to  four  months  overdue.  Occasional  partial 
payments  had  been  made  wherever  a  creditor  had  become 
urgent. 


12  MERCANTILE  CREDITS 

Finally  one  creditor  discovered  that  this  merchant  had 
been  absent  for  about  a  month.  Employees  in  charge  said 
that  he  was  calling  on  the  agencies  of  the  house  throughout 
the  West,  but  could  not  say  where  he  could  be  reached  by 
wire  or  mail.  Then  things  began  to  happen  rapidly, 
including  bankruptcy  proceedings.  The  schedule  showed 
about  $36,000  liabilities,  with  assets  of  about  $4,000. 
Two  houses  had  claims  for  about  $5,000  each.  The 
missing  merchant  could  not  be  located  and  was  supposed 
to  have  gone  back  to  Europe,  where  under  the  then 
existing  rates  of  exchange  he  could  live  as  a  retired 
capitalist.  At  the  obsequies  conducted  by  the  creditors  it 
was  accepted  as  self-evident  that  his  integrity  was  not 
able  to  stand  against  the  test  of  losing  money  and  that 
the  credit  men  were  responsible  to  the  extent  that  they 
had  oversold  the  account  by  not  holding  him  strictly  to 
the  terms  of  settlement.  Going  beyond  safe  limits  in 
credit-granting  placed  before  this  merchant  both  oppor- 
tunity and  temptation. 

An  Important  Equipment 

Another  characteristic  which  the  credit  man  should 
develop  to  the  fullest  degree  is  tact.  Tact  and  intuition 
may  be  closely  allied,  but  usually  what  is  termed  intuition 
is  really  a  prompting  of  judgment  based  on  some  fact  in 
the  examination  not  fully  recognized  at  the  time.  Such  a 
prompting  should  always  be  heeded  and  traced  to  its 
source. 

Tact  may  be  described  as  a  combination  of  common 
sense,  an  agreeable  manner,  and  genuine  sincerity.  It 
enters  into  personality.  It  is  vital  in  the  successful 
handling  of  the  credit  department. 

The  development  of  tact  requires  the  following  traits : 

i.  Openness  of  mind.    In  dealing  with  applicants,  the 


CREDIT  AND  THE  CREDIT  MAN  13 

credit  man  should  exercise  a  willingness  to  hear  what  they 
may  say,  to  get  at  their  exact  condition,  and  in  a  degree  to 
put  himself  in  their  place,  so  as  to  see  all  sides  of  a 
proposition.  He  should  be  progressive  in  his  attitude, 
willing  to  learn  at  all  times,  and  to  substitute  new  methods 
whenever  they  represent  a  gain  in  efficiency. 

2.  Care  and  caution.     He  must  learn  to  weigh  his 
words.     No  tactful  man  is  impetuous.    He  must  acquire 
the  judicial  quality  of  mind. 

3.  Development  of  a  good  memory,  especially  as  to 
peculiarities  of  the  customer  of  the  house.    While  it  is  not 
desirable  to  require  memory  to  carry  facts  which  should 
be  recorded  in  the  credit  file,  yet  the  credit  man  may 
frequently  be  aided  by  a  trained  memory  in  avoiding 
sensitive  spots. 

The  quality  of  tact  will  aid  the  credit  men  in  develop- 
ing the  faculty  of  reading  human  nature.  In  a  personal 
interview  with  the  customer  it  will  enable  him  to  get  the 
information  he  desires  so  adroitly  and  pleasantly  as  to 
avoid  causing  any  embarrassment  or  arousing  any  resent- 
ment. It  will  be  helpful  in  dealing  with  other  depart- 
ments of  the  business,  and  especially  in  securing  the  hearty 
co-operation  of  the  salesmen — making  them  feel  that  they 
are  a  part  of  the  credit  force.  The  invaluable  power  to 
read  and  influence  men  in  this  way  comes  only  through 
training  and  experience. 

Other  Requirements 

The  credit  man  should  be  constantly  alert  to  recognize 
and  grasp  every  item  of  information  that  has  a  bearing 
on  credits.  If  he  reads  weather  reports  or  the  financial 
columns  of  the  daily  papers,  he  should  be  thinking  of  the 
effect  which  every  fact  may  have  on  credit-granting.  He 
should  be  at  all  times  and  in  all  places  a  student  of  his 


14  MERCANTILE  CREDITS 

enterprise  in  much  the  same  way  and  to  the  same  extent 
as  the  operator  on  the  board  of  trade  or  on  the  stock 
exchange  scans  every  bit  of  newspaper  information  that 
may  affect  the  price  of  his  commodity  or  his  investment. 
One  writer  of  much  experience  would  require  for  the 
successful  credit  man  another  qualification  which  he 
terms  "vision."  An  ancient  writer  once  said,  "When  there 
is  no  vision,  the  people  perish."  Probably  this  writer  on 
credits  does  not  have  precisely  such  a  conception  in  mind, 
but  he  undoubtedly  gives  the  word  a  far-reaching  signifi- 
cance. To  the  credit  man  it  can  mean  the  ability  to  look 
beyond  the  horizon  of  his  own  desk;  to  add  continually 
to  his  store  of  knowledge  by  reading,  and  to  his  stock  of 
experience  by  exchanging  views  and  ideas  with  other 
earnest  men  in  his  profession.  Or  it  can  mean  the  faculty 
of  looking  into  the  future  and  correctly  gauging  the 
possible  outcome  of  influences  and  tendencies  which  are 
at  work  on  the  credit  risk  he  is  considering,  and  which 
he  alone,  perhaps,  has  recognized.  "Vision"  may  also 
mean  that  ideal  of  attainment  which  the  credit  man  is 
desiring  for  himself,  the  height  and  scope  of  which  will 
largely  determine  the  reality  of  the  success  which  he  hopes 
to  reach — the  desire  to  be  not  just  an  ordinary  credit  man, 
but  the  very  best  possible,  never  allowing  himself  to  think 
that  he  has  reached  the  limit  of  his  development. 

Duties  of  the  Credit  Man 

In  many  houses  the  credit  man  will  gradually  take  on 
more  duties  than  merely  checking  the  orders  and  looking 
after  the  collections.  He  will  usually  have  charge  of  the 
books  of  accounting  and  the  keeping  of  records  and 
statistics.  Therefore  a  good  knowledge  of  accounting 
will  be  helpful  to  him.  He  will  have  more  or  less  to  do 
with  the  financing  of  the  business,  at  least  to  the  extent  of 


CREDIT  AND  THE  CREDIT  MAN  15 

watching  the  bank  balance,  keeping  track  of  payments  of 
notes,  and  the  settlement  of  purchase  accounts. 

The  credit  man  will  be  in  a  large  measure  the  cus- 
todian of  the  goodwill  of  the  business,  inasmuch  as  this 
goodwill  is  represented  by  the  accounts  on  the  ledgers,  and 
he  is  responsible  for  the  proper  handling  and  the  ultimate 
collection  of  these  accounts.  He  co-operates  with  the 
sales  department  in  keeping  these  customers  loyal  and 
satisfied. 

He  may  be  the  auditor  and  statistician  of  the  or- 
ganization, a  student  of  the  details  of  the  business,  com- 
piling percentages  and  keeping  comparative  records  of 
sales,  collections,  expenses,  and  similar  details.  He  may 
have  charge  of  placing  the  insurance  and  keeping  it 
renewed.  This  will  include  a  decision  as  to  the  necessary 
amount  to  be  carried.  These  duties  may  come  to  him 
because  he  is  in  closest  touch  with  the  records  of  the 
business,  the  books  of  accounting,  and  the  general  work 
of  the  office.  He  should  not,  however,  get  too  busy  with 
details  at  any  time  to  prevent  him  from  using  care  in 
opening  a  new  account,  or  in  watching  an  old  account  that 
may  be  getting  slow.  Especially,  he  must  not  allow  any- 
thing to  make  him  careless  in  the  collection  of  accounts 
when  due. 

Primarily  the  credit  man  will  be  judged  by  the  record 
of  losses  from  bad  debts.  This  item  will  determine  his 
skill  and  ability  in  judging  credits.  In  applying  this 
standard  of  judgment,  the  policy  of  the  house  in  handling 
sales  and  fixing  terms  must  be  considered.  Also,  whether 
the  conditions  obtaining  in  his  line  of  trade  require  a  con- 
servative or  a  liberal  rule  in  securing  a  proper  volume  of 
business  will  be  taken  into  account.  This  judgment 
should  be  based  on  the  average  result  of  several  years' 
experience  rather  than  of  any  one  year,  and  it  should  be 


16  MERCANTILE  CREDITS 

kept  in  mind  that  a  credit  manager,  by  striving  for  a  low 
loss  ratio,  may  become  ultra-conservative  and  thus  cause 
loss  to  his  firm  in  this  way. 

Reduction  of  volume  means  increased  ratio  of  over- 
head expense.  Therefore  this  standard  of  measurement 
should  be  used  with  intelligence  and  discretion.  The 
credit  man  himself  keeps  this  record  of  losses,  and  he 
should  always  bear  in  mind  the  possibility  of  loss  of  trade 
by  ultra-conservatism,  or  refusal  to  take  any  risk  on  ac- 
counts. In  seeking  to  eliminate  losses  from  bad  debts  he 
must  not  lose  sight  of  increasing  sales. 

Importance  of  Successful  Collecting 

If  the  credit  man  is  handling  the  collections,  he  will  be 
judged  by  the  amount  of  outstanding  accounts.  The  cash 
receipts  should  be  equal  to  the  sales  or  relatively  so.  If 
the  customary  terms  of  the  line  of  business  are  thirty 
days,  there  should  not  be  more  than  the  equivalent  of 
thirty  days'  sales  outstanding  on  the  average.  This  affects 
what  is  called  the  "turnover"  of  the  business.  Where  a 
larger  amount  of  accounts  receivable  are  regularly  and 
continuously  outstanding,  either  credit  is  being  extended 
too  liberally  to  customers  who  are  chronically  slow  pay, 
or  the  collections  are  being  neglected. 

Also  the  average  amount  of  cash  discounts  being 
allowed  in  proportion  to  daily  receipts  will  indicate 
whether  the  credit  man  is  failing  to  enforce  terms  prop- 
erly and  becoming  too  liberal  in  allowing  unearned  dis- 
counts. The  credit  man  should  keep  statistics  on  these 
points  and  pass  judgment  on  himself  accordingly.  If  he 
is  in  charge  of  the  office,  the  amount  of  office  expense 
becomes  a  standard  of  measurement,  and  this  will  be  a 
test  of  his  executive  ability  or  capacity  to  manage. 


CREDIT  AND  THE  CREDIT  MAN  17 

Some   Knowledge   of   Law   and    Business   Methods 
Helpful 

One  practical  writer  on  credits  claims  that  a  knowl- 
edge of  law  is  indispensable  but  fails  to  indicate  how  much 
legal  knowledge  would  be  necessary.  No  credit  man  has 
time  to  be  a  lawyer,  but  a  general  knowledge  of  the  rudi- 
ments of  commercial  law  will  be  exceedingly  valuable 
to  him.  He  should  realize  the  importance  of  keeping 
in  mind  the  exemption  laws  of  the  48  states;  not  to  try 
to  retain  all  the  details  in  his  memory,  but  to  look  them 
up  when  checking  an  important  credit  in  any  state.  He 
should  also  familiarize  himself  with  the  basic  principles 
involved  in  contracts,  the  Statutes  of  Limitations,  how  to 
draw  a  continuing  guaranty  contract,  a  proxy,  a  bill  of 
sale,  a  power  of  attorney,  a  proof  of  claim,  and  similar 
legal  forms.  He  can  inform  himself  concerning  the  rights 
and  liabilities  of  married  women,  the  bulk  sales  laws,  the 
Uniform  Sales  Act,  the  Negotiable  Instruments  Law,  and 
the  foreign  corporation  laws  of  the  different  states.  This 
rudimentary  knowledge  of  commercial  law  will  frequently 
keep  him  from  making  a  mistake  that  might  be  expensive, 
and  will  help  him  bear  in  mind  that  it  is  frequently  im- 
portant for  a  credit  man  to  know  when  he  ought  to  obtain 
legal  advice  on  some  of  these  points  before  he  goes  too 
far. 

A  knowledge  of  business  methods  may  help  the  credit 
man  in  determining  when  the  customers  of  the  house  are 
doing  business  with  such  methods  as  will  give  them  a  fair 
chance  of  success,  considering  the  line  of  business  in 
which  they  are  engaged.  Do  they  know  what  it  costs 
them  to  do  business?  Constructive  credit-granting  con- 
templates the  ability  to  advise  the  customers  of  the  house 
on  such  points  when  it  develops  that  they  need  assistance. 


18  MERCANTILE  CREDITS 

Member  of  Firm  as  Credit  Man 

One  writer  on  credits  has  advanced  the  suggestion  that 
the  credit  man  should  always  be  an  employee  and  not  a 
member  of  the  firm.  He  gives  two  reasons  for  this  view : 
(i)  if  the  credit  manager  is  a  member  of  the  firm  he  will 
to  a  greater  extent  be  desirous  of  increasing  sales  volume 
and  profits  and  will  unconsciously  or  consciously  allow 
these  objectives  to  sway  his  judgment  and  incline  him  to 
be  too  liberal  in  judging  credits;  (2)  if  he  should  not  be 
successful  in  discharging  the  duties  of  the  credit  position, 
there  might  be  too  much  difficulty  and  embarrassment  in 
persuading  him  to  give  way  to  someone  else  better  quali- 
fied. 

Therefore,  this  writer  argues,  the  credit  manager 
should  be  an  employee  whose  position  depends  entirely 
upon  his  successful  discharge  of  its  duties  and  who  can 
be  more  readily  changed  or  relieved  if  a  change  is  found 
necessary. 

Whether  this  view  is  correct  will  depend  largely  on 
circumstances,  on  the  organization  of  the  firm,  and  on  the 
personal  equation.  No  arbitrary  rule  can  be  applied.  It 
is  not  difficult  to  believe  that  as  a  rule  the  member  of  the 
firm  who  is  a  misfit  at  the  credit  desk  will  be  open  to 
conviction,  and  his  self-interest  will  aid  him  or  prompt 
him  to  give  way  to  "the  man  who  can." 

Question  of  Authority 

There  are  those  who  hold  to  the  view  that  the  decision 
of  the  credit  man  should  be  final  and  that  no  one  should 
be  allowed  to  overrule  him — that  he  should  be  the  su- 
preme authority  in  his  department.  At  first  glance  this 
theory  seems  to  assume  infallibility  for  the  credit  man, 
which  is  a  dangerous  and  untenable  assumption.  It  is 
more  likely,  however,  to  be  based  on  the  thought  that 


CREDIT  AND  THE  CREDIT  MAN  19 

since  the  credit  manager  is  responsible  for  the  success  of 
his  department  he  should  have  a  free  hand  and  be  un- 
hampered, because  only  then  will  he  be  willing  to  be 
judged  by  the  results  he  achieves. 

It  will  probably  always  be  better  for  the  credit  man 
not  to  demand  this  authority  in  an  arbitrary  manner,  or 
as  a  right.  Such  an  attitude  may  not  be  an  aid  to  team 
work  and  may  prevent  that  perfect  spirit  of  co-operation 
which  is  the  ideal  element  in  organization.  His  attitude 
should  invite  advice,  suggestion,  and  co-operation,  and 
show  a  readiness  and  willingness  to  take  the  responsibility 
of  the  final  decision. 

Let  the  credit  man  show  that  his  decisions  are  based 
on  sound  judgment  and  that  he  can  always  defend  them 
with  valid  reasons,  and  let  the  result  of  his  decision  vin- 
dicate the  accuracy  of  his  conclusions.  He  will  then 
have  little  difficulty  in  obtaining  recognition  of  the  au- 
thority which  he  thinks  should  go  with  his  position.  In 
fact,  he  may  be  agreeably  surprised  at  the  cheerful  una- 
nimity with  which  everybody  will  yield  the  responsibility 
to  him. 


CHAPTER  II 

THE  CREDIT  RISK— THE  CUSTOMER 

The  Credit  Equation 

Every  order  which  comes  to  the  desk  of  the  credit 
man  represents  an  equation  to  be  solved,  the  unknown 
quantity  in  which  is :  "Will  he  pay  ?"  It  is  the  task  of  the 
credit  man  to  be  reasonably  certain  that  he  has  found  the 
correct  answer  to  the  equation.  He  needs  to  make  sure, 
so  far  as  possible,  that  he  is  dealing  with  all  the  factors 
which  have  a  bearing  on  the  equation  before  him.  Over- 
looking even  one  minor  detail  or  fact  in  the  information 
obtained,  or  failure  to  obtain  all  the  facts  which  will  in- 
fluence the  final  result,  may  lead  to  a  wrong  conclusion. 

Capital,  Capacity,  and  Character 

It  is  perhaps  not  definitely  known  who  first  sum- 
marized in  alliterative  form  the  factors  which  enter  into 
the  credit  equation.  At  all  events,  William  Post,  of  the 
Central  National  Bank,  Philadelphia,  in  a  published  dis- 
cussion, grouped  these  factors  under  the  three  headings  of 
Capital,  Capacity,  and  Character.  This  grouping  has  been 
favorably  regarded  by  credit  men,  perhaps  originally  be- 
cause of  the  alliteration,  and  later  because  of  the  compre- 
hensiveness of  the  classification,  for  there  is  probably  no 
factor  which  cannot  properly  be  included  under  one  of 
these  three  captions. 

Considering  the  three  factors  in  the  order  of  their  im- 
20 


THE  CREDIT  RISK— THE  CUSTOMER  21 

portance,  the  following  standards  of  relative  value  will  be 
reached : 

1.  Capital.    To  show  that  the  applicant  has  sufficient 

resources  of  his  own  to  finance  successfully  the 
volume  of  business  he  is  attempting  to  do. 

2.  Capacity.    To  show  that  he  will  know  how  to  conserve 

his  capital  and  resources  with  such  care  that  he  will 
continue  to  discount  his  purchases  or  meet  his 
obligations,  and  keep  on  a  safe  basis. 

3.  Character.    To    indicate    that    he    possesses    those 

qualities  of  honesty  and  integrity  which  will  make 
him  always  willing  and  determined  to  meet  his 
obligations,  no  matter  what  unexpected  emergencies 
or  conditions  may  develop. 

Dealing  with  Credit  Risk  on  a  Percentage  Basis 

Accepting  this  grouping,  if  the  risk  under  considera- 
tion should  be  dealt  with  on  a  percentage  basis,  the  rating 
of  the  ideal  credit — that  is,  the  merchant  who  may  safely 
be  trusted  without  any  doubt  or  question — will  stand  at 
100  per  cent.  Then  as  a  standard  of  measurement,  if  it 
is  assumed  that  the  three  factors  are  of  equal  importance 
as  a  basis  for  credit,  the  division  of  this  percentage  will 
be  as  follows : 

Let  capital,  or  financial  resources,  represent 33  1/3% 

Let  capacity,  which  covers  ability  and  experience,  repre- 
sent   33  1/3% 

Let    character,    which    includes    honesty    and    integrity, 

represent 33  i/3%. 

Total 100% 

Those  who  desire  to  strive  for  mathematical  accuracy 
in  their  decisions  may  then  measure  the  particular  credit 
under  consideration  according  to  these  standards  or  per- 
centages. Credit  men  will,  of  course,  differ  materially 
as  to  the  application  of  such  a  percentage  plan,  and  some 
of  them  will  perhaps  reject  it  altogether. 


22  MERCANTILE  CREDITS 

Importance  of  Capital 

Credit  men  who  place  the  emphasis  strongly  on 
capital  as  the  main  basis  for  credit  have  a  strong  argument 
for  their  position.  It  surely  ranks  first  as  a  credit 
foundation,  for  when  the  dispenser  of  credit  looks  at  the 
large  assets  and  small  liabilities  of  the  firms  which  always 
take  cash  discounts  or  who  pay  promptly  at  maturity,  he 
is  justified  in  believing  that  such  applicants  for  credit 
have  capacity  and  character  also,  or  they  could  not  have 
achieved  the  success  which  these  ratings  indicate. 

It  will  probably  be  found  by  most  houses,  and  in 
nearly  every  line  of  business,  that  from  70  to  75  per  cent 
of  the  orders  received  in  any  season  are  accepted  on  the 
mercantile  agency  ratings  alone,  especially  those  from 
regular  customers  who  discount  their  purchases.  These 
orders  give  the  credit  man  no  anxiety  whatever.  The 
houses  from  which  they  come  have  adequate  capital  and 
small  liabilities,  and  unless  the  order  is  for  a  much  larger 
amount  than  usual,  or  is  from  a  new  customer,  it  is 
accepted  without  taking  time  to  revise  the  credit  file.  In 
the  case  of  a  new  customer  a  credit  file  should  always  be 
made  up. 

The  remaining  25  or  30  per  cent  of  the  orders  come 
automatically  into  a  different  class.  They  are  in  that 
other  class  because  the  mercantile  agency  ratings  on  them 
indicate  that  they  do  not  possess  adequate  capital,  are  not 
discounting  their  purchases,  and  their  credit  rating  is 
restricted  accordingly.  Sometimes  this  withholding  of 
agency  rating  may  result  from  lack  of  information,  but 
that  fact  is  quickly  disclosed  under  the  usual  investigation. 
Those  applicants  for  credit  who  have  no  agency  ratings  as 
to  capital  and  those  whose  credit  rating  is  questioned,  all 
become  equations  in  which  the  unknown  quantity — "Will 
he  pay  ?" — must  be  carefully  ascertained. 


THE  CREDIT  RISK— THE  CUSTOMER  23 

Capacity — Its  Elements 

When  capital  is  lacking,  dependence  must  be  placed  on 
the  other  two  requisites  for  a  credit  basis,  viz.,  capacity 
and  character,  the  latter  of  which  is  treated  in  the  next 
chapter.  All  orders  from  this  class  of  customers  come 
under  the  head  of  close  decisions.  The  investigation 
must  be  searching  and  complete.  In  every  case  the  credit 
man  should  probe  first  of  all  for  information  as  to  possible 
resources.  There  may  be  some  capital  assets  which  have 
not  been  disclosed  by  information  thus  far  obtained; 
while  if  the  credit  file  on  an  old  customer  is  being  revised, 
there  may  have  been  some  change  in  capital  conditions 
which  the  credit  department  should  know. 

The  factor  of  capacity  includes  both  ability  and 
experience.  There  are  two  classes  of  customers  to  whom 
this  test  should  be  carefully  applied.  The  first  is  com- 
prised of  those  who  have  previously  been  in  business  and 
therefore  have  established  a  record  by  which  they  can 
be  gauged.  The  second  class  comprises  those  who  are 
going  into  business  for  the  first  time  and  whose  capacity 
has  not  yet  been  tested. 

It  has  been  claimed  by  credit  men  of  experience  that 
if  a  firm  or  individual  embarks  in  business  without  at  least 
a  reasonable  amount  of  capital,  this  fact  is  in  itself  an 
indication  of  lack  of  ability  or  good  business  judgment 
and  raises  a  question  at  the  outset  as  to  capacity.  There 
is  some  show  of  reason  for  this  view.  Every  such  firm 
must  make  an  investment  for  fixtures  and  equipment,  and 
must  go  through  a  period  of  building  up  the  necessary 
volume  of  trade  to  give  a  profit  in  excess  of  the  cost  of 
doing  business.  Until  that  point  is  reached,  the  under- 
taking is  in  an  experimental  stage  that  will  furnish  the 
severest  test  of  capacity.  Many  an  enterprise  has  failed 
to  last  through  the  process  of  "getting  started."  It  will 


24  MERCANTILE  CREDITS 

require  the  best  judgment  of  the  dispenser  of  credits  to 
determine  in  such  cases  whether  the  applicant  has  a 
reasonable  chance  to  succeed  in  his  undertaking. 

As  opposed  to  this  claim  it  may  be  urged  that  the 
majority  of  successful  firms  began  with  limited  capital  or 
perhaps  none  at  all,  and  yet  have  developed  a  large  and 
prosperous  business.  When  the  records  and  methods  of 
such  firms  are  investigated,  however,  it  will  be  found  that 
they  were  content  to  begin  in  a  small  way,  and  that  they 
traded  strictly  within  the  limits  of  their  small  resources 
until  accumulating  profits  enabled  them  to  expand  with 
safety.  This  in  itself  is  one  of  the  most  satisfactory  and 
convincing  tests  of  ability. 

Prudence  and  Thrift 

A  credit  man  for  a  large  western  wholesale  house 
related  an  incident  in  his  own  experience  which  illustrates 
what  a  small  beginning  may  mean.  He  met  one  day  in 
the  store  one  of  their  most  successful  customers,  whose 
rating  was  then  $50,000  to  $75,000,  and  took  occasion  to 
congratulate  him  on  the  success  of  his  business.  The 
merchant  said:  "I  feel  that  I  owe  my  success  largely  to 
you.  Do  you  remember  the  first  time  I  called  on  you? 
I  told  you  I  had  $75,  and  that  if  you  would  give  me  a 
credit  line  of  $175,  I  could  go  into  business.  You  at  first 
objected  to  granting  the  credit,  but  we  talked  it  over  and 
you  finally  consented." 

The  credit  man  recalled  the  incident  and  expressed  his 
gratification  at  having  been  able  to  contribute  in  that  way 
to  such  a  successful  business  career. 

"Well,"  said  the  merchant,  "there  was  one  thing  about 
it  which  I  did  not  tell  you  that  day.  The  $75  I  had  was 
borrowed." 

The  only  further  comment  made  by  the  credit  man 


THE  CREDIT  RISK— THE  CUSTOMER  25 

was  that  he  had  never  before  realized  what  self-denial, 
hard  work,  and  strict  attention  to  business  that  merchant 
must  have  practiced  in  those  days  of  his  beginning  and 
while  he  was  getting  on  his  feet  commercially.  It  was  an 
example  of  genuine  thrift. 

Applicants  with  Previous  Business  Record 

In  investigating  capacity,  when  there  is  a  previous 
record  in  business,  the  credit  man  should  seek  to  learn 
how  long  this  business  was  conducted  without  accumu- 
lating any  surplus  or  capital,  and,  if  that  period  was  of 
some  length,  what  the  underlying  cause  was  of  the  failure 
to  earn  anything  beyond  a  living.  This  is  a  fair  test  of 
ability  or  the  lack  of  it.  Lack  of  success  may  have 
resulted  either  because  the  merchant  was  not  a  success- 
ful, competent  buyer,  or  because  he  is  not  possessed  of 
good  business  judgment.  If  he  has  failed  in  any  previous 
undertaking,  what  was  the  cause  of  the  failure?  Was  it 
poor  management?  Why  does  the  experience  he  has 
gained  in  his  business  career  not  aid  him  in  making 
money  ? 

Every  credit  man  will  find  a  certain  number  of  cases 
in  which  a  merchant  has  been  in  business  a  long  time  and 
has  reached  the  age  of  fifty  to  sixty  years.  He  has 
accumulated  nothing,  and  his  rating  is  little  or  no  better 
than  when  he  began.  He  has  come  to  the  time  when  he 
is  slowing  up  in  initiative  and  energy.  He  himself  does 
not  realize  this,  or  does  not  admit  it,  but  the  law  of  cause 
and  effect  is  working  inexorably  in  his  case.  He  cannot 
as  a  rule  hold  his  own  or  compete  with  the  aggressiveness 
and  enterprise  of  younger  competitors.  One  indication  of 
this  may  be  that  he  is  no  longer  taking  cash  discounts,  and 
another  that  his  volume  of  business  is  slowly  and  surely 
diminishing.  The  wise  dispenser  of  credits  will  not  over- 


26  MERCANTILE  CREDITS 

look  this  factor  in  the  estimate  of  capacity.  Credit 
should  be  restricted  accordingly,  no  matter  what  sentiment 
or  sympathy  may  dictate. 

Excessive  Number  of  Partners 

Further,  if  the  firm  under  consideration  is  a  copartner- 
ship, how  many  families  must  live  on  the  earnings  ?  This 
is  sometimes  a  very  important  question.  Can  the  business 
earn  enough,  all  things  considered,  to  carry  the  burden 
which  will  be  imposed  upon  it  in  this  way?  Many  firms 
start  business  with  three  partners.  In  such  cases  it 
frequently  happens  that  within  two  years  two  of  them 
have  dropped  out  because  earnings  were  not  sufficient  for 
three.  If  the  retiring  partners  withdrew  their  capital  con- 
tribution to  the  investment,  the  remaining  member  of  the 
firm  may  find  it  difficult  to  continue. 

With  a  firm  now  in  business  the  investigation  should 
include  another  possibility:  What  is  the  record  with 
houses  now  selling  the  risk  ?  Are  they  now  trying  to  close 
the  accounts  with  him,  that  is,  trying  to  "unload"  ?  Such 
an  account,  in  the  language  of  the  mercantile  agency,  had 
better  be  left  "in  the  hands  of  those  already  interested." 

Firms  Without  Previous  Record 

If  the  applicant  is  embarking  in  business  for  the 
first  time  with  no  previous  record,  then  his  capacity  or 
ability  is  yet  to  be  demonstrated.  Such  cases  are  difficult 
to  judge,  mainly  because  there  are  no  facts  on  which  to 
base  a  judgment.  There  are  some  things  which  may  be 
learned  through  inquiry,  such  as :  Where  did  he  grow  up  ? 
What  previous  vocation  has  he  followed?  What  is  his 
education?  Has  he  saved  up  any  money  thus  far,  or 
shown  any  indication  of  being  thrifty  or  economical? 
How  much  competition  will  he  have  to  meet  in  his  under- 


THE  CREDIT  RISK— THE  CUSTOMER  27 

taking?  Has  he  shown  good  judgment  in  selecting  his 
business  location? 

Inasmuch  as  his  native  capacity  and  ability  are  to  be 
considered  his  chief  asset,  and,  in  case  he  does  not  suc- 
ceed, his  creditors  may  have  to  pay  for  his  business 
education  or  his  failure  to  develop  the  necessary  qualities, 
the  credit  man  must  be  sure  of  his  ground  or  be  able  to 
give  himself  satisfactory  reasons  for  his  action,  if  he 
decides  to  extend  credit  in  such  a  case. 

By  what  process  of  divination,  or  through  what 
exercise  of  judgment  can  an  accurate  decision  be  reached 
in  such  a  case?  If  a  personal  interview  is  possible,  the 
credit  man's  ability  to  judge  human  nature  may  give  him 
some  valuable  assistance  in  interpreting  the  facts  he  has 
been  able  to  learn. 

In  such  an  instance  it  may  be  well  to  keep  in  mind 
the  commonly  accepted  definition  of  a  merchant,  which  is, 
"One  who  can  buy  and  sell  goods  successfully." 

The  credit  man  can  only  take  the  facts  he  has  in  hand, 
carefully  examine  them  in  the  light  of  his  best  unbiased 
judgment,  calculate  as  nearly  as  he  can  the  probable  work- 
ing out  of  cause  and  effect,  and  decide  whether  the  appli- 
cant will  meet  the  requirements  of  the  above  definition. 
Here  may  be  one  of  the  coming  merchant  princes.  On  the 
other  hand,  here  may  be  merely  an  applicant  who  will 
develop  into  an  average  business  man  earning  a  living, 
and  possibly  something  besides,  as  a  result  of  his  effort. 
Or  here  may  be  a  man  who  lacks  the  necessary  qualifica- 
tions which  constitute  ability  to  such  an  extent  that  he 
has  no  possible  chance  of  success. 

Foreigners  as  Credit  Applicants 

A  considerable  percentage  of  applicants  for  credit  in 
many  lines  will  be  foreigners  who  have  come  to  this  land 


2g  MERCANTILE  CREDITS 

of  opportunity  and  have  decided  to  go  into  mercantile 
business.  They  may  have  been  peasants  or  laborers  in 
the  land  of  their  birth,  and  have  neither  capital  nor 
experience  for  this  new  undertaking.  Whether  they  have 
ability  is  something  to  be  determined  only  by  results. 
Constructive  credit-granting  will  hold  beginners  of  this 
class  to  a  cash  basis  until  they  have  demonstrated  their 
ability  to  succeed. 

They  quickly  discover,  however,  that  other  merchants 
are  obtaining  credit  and  they  immediately  become  ambi- 
tious to  secure  the  same  privilege.  They  have  not  had 
the  training  which  enables  them  to  realize  the  danger  of 
assuming  obligations  which  they  may  not  be  able  to  meet, 
and  they  often  fail  because  they  secure  credit  too  easily. 
Before  they  realize  it  they  have  overbought,  or  have 
bought  without  proper  judgment.  A  study  of  failures  of 
this  class  will  often  show  an  astonishing  disregard  of 
the  laws  of  judicious  credit-granting,  reflected  in  large 
liabilities  and  nominal  assets. 

Severest  Test  of  Credit  Man's  Skill 

In  the  solving  of  such  an  equation  the  credit  man 
finds  the  severest  test  of  his  skill  and  judgment,  but  at 
the  same  time  his  greatest  opportunity  for  acquiring  ex- 
perience. Or  the  proposition  may  be  stated  in  another 
form.  The  credit  applicant  in  this  class  has  no  capital 
of  his  own.  If  he  has  been  in  business  before,  he  has 
failed  to  accumulate  anything.  If  he  is  a  beginner,  his 
ability  is  yet  to  be  demonstrated.  He  is  asking  the  credit 
man  to  give  him  that  which  is  a  substitute  for  capital — 
credit ;  and  to  do  this  on  the  belief  that  he  will  make  good. 
This  is  the  equivalent  to  asking  for  a  loan. 

The  credit  man  must  now  decide  whether  the  security 
is  satisfactory. 


THE  CREDIT  RISK— THE  CUSTOMER  29 

The  Factor  of  Capacity  in  1920-21 

During  the  readjustment  period  following  the  World 
War,  comprising  the  years  1920  and  1921,  the  factor  of 
ability  for  the  time  being  was  the  most  important  con- 
sideration in  reaching  credit  decisions.  The  great  ma- 
jority of  firms  showed  operating  losses  in  their  balance 
sheets,  and  a  large  number  showed  impairment  of  cap- 
ital. Both  banks  and  merchandise  creditors  were  called 
upon  to  grant  liberal  extensions  to  debtors.  If  given 
time,  they  might  pull  through.  The  heavy  losses  through 
depreciated  inventories  made  the  agency  ratings  of  doubt- 
ful value  as  to  capital.  Capacity,  or  the  good  business 
judgment  and  ability  which  the  debtor  might  possess,  be- 
came therefore  the  main  consideration. 

The  houses  which  qualified  under  this  test  and  which 
showed  evidence  of  good  business  management  were  al- 
most invariably  aided  in  pulling  through  this  time  of 
stress.  The  large  increase  during  this  period  in  the 
number  of  failures  among  those  who  were  classed  under 
"lacking  ability,"  indicated  that  those  who  did  not  possess 
this  important  asset  failed  to  command  the  necessary 
credit  assistance  for  tiding  over  the  emergency. 

Another  C  for  the  Credit  Man 

Charles  E.  Meek,  a  trained  credit  man  himself,  at 
one  time  Secretary  and  later  President  of  the  National 
Association  of  Credit  Men,  now  an  Assistant  Vice-Presi- 
dent  of  the  American  Exchange  National  Bank,  New 
York,  has  given  this  timely  suggestion  to  credit  grantors : 

There  is  no  mystery  connected  with  the  duties  of  a  credit  man. 
No  secret  formula  need  be  used  in  the  practice  of  what  has  been 
termed  the  new  profession. 

There  are,  however,  well-defined  rules  which,  if  not  recognized, 
usually  bring  disastrous  results.  A  credit  man  is  just  a  human 
being.  His  judgment  will  err  as  often  as  that  of  the  next  man. 


30  MERCANTILE  CREDITS 

The  three  C's  are  famous  words  in  credit  circles :  Character, 
Capacity,  Capital.  Where  these  are  found  wanting,  either  singly 
or  collectively,  the  employment  of  Courage  in  arriving  at  a  de- 
cision will  always  lessen  business  failures,  the  causes  of  which  are 
primarily  Dishonesty — Incompetency — Lack  of  Capital. 

Courage,  in  word  and  action,  should  be  the  guiding  star  of  the 
credit  man. 


CHAPTER  III 

CHARACTER  AS  A  CREDIT  ASSET 

Judging  Character 

In  dealing  with  the  third  factor  of  the  credit  equa- 
tion there  are  certain  things  that  may  be  classed  as  funda- 
mental : 

1.  That  character  is  synonymous  with  honesty. 

2.  That  honesty  is  an  essential  requisite  in  an  applicant 

for  credit,  for  no  one  will  extend  credit  to  a  man 
known  to  be  dishonest. 

3.  That  it  is  difficult  to  determine,  in  a  credit  investiga- 

tion, whether  the  analysis  of  the  facts  obtained  has 
disclosed  actual  character  or  genuine  honesty, 
which  is  an  intangible  quality,  or  whether  the 
element  of  doubt  remains. 

The  physician  in  diagnosing  symptoms  of  disease 
under  modern  conditions  has  the  assistance  of  the  X-ray 
machine  and  laboratory  analysis.  Even  with  the  use  of 
these  auxiliaries  furnished  by  science  there  are  cases 
where  a  post-mortem  examination  is  necessary  to  show 
what  actual  disorders  existed. 

The  credit  man  in  diagnosing  for  character  meets 
similar  difficulties  and  feels  the  need  of  X-ray  machine 
and  laboratory  when  he  is  making  this  part  of  his  inves- 
tigation. All  too  frequently  he  gets  the  real  facts  at  the 
post  mortem  of  a  creditors'  meeting.  For  character  is 
the  pure  gold  of  honesty  separated  from  the  dross.  It  is 


32  MERCANTILE  CREDITS 

•i  what  the  man  really  is  in  his  heart.  Too  often,  however, 
the  examination  only  goes  far  enough  to  reveal  his 
reputation,  which  is  what  he  is  supposed  to  be  by  the 
outside  world. 

It  is  not  known  whether  Diogenes  was  a  credit  man  in 
ancient  Greece,  but  if  he  was  he  recognized  the  difficulty 
of  this  part  of  the  investigation  and  used  a  lighted  lantern 
as  a  substitute  for  the  X-ray  machine.  According  to 
tradition  he  carried  it  in  daylight  through  the  streets  of 
Athens,  and  when  called  on  to  explain  this  eccentricity,  he 
replied,  "I  am  looking  for  an  honest  man." 

Morgan  Episode 

In  discussing  honesty  as  a  credit  asset,  speakers  and 
writers  on  the  subject  have  frequently  referred  to  an 
episode  in  the  investigation  of  the  Pujo  Committee  of 
Congress  when  the  late  J.  P.  Morgan  was  being  examined. 
The  attorney,  Samuel  Untermyer,  judging  from  the 
questions  asked,  wished  to  prove  by  Mr.  Morgan  that 
loans  were  only  made  to  applicants  who  possessed  money 
or  property  resources,  and  that  a  money  trust  existed. 
Evidently  Mr.  Morgan  was  not  willing  to  testify  that  such 
were  the  only  requisites,  and  in  reply  to  one  question  said, 
"I  have  known  a  man  to  come  into  my  office,  and  I  have 
given  him  a  check  for  a  million  dollars,  when  I  knew  he 
had  not  a  cent  in  the  world."  In  further  replies  Mr. 
Morgan  said  that  this  was  not  unusual  and  that  the  first 
thing  in  commercial  credit  is  character. 

At  a  convention  of  the  National  Association  of  Credit 
Men  one  of  the  speakers  was  a  clergyman  who  had 
chosen  "Character"  as  his  subject.  He  referred  to  the 
three  Cs  advocated  by  the  Association,  and  expressed  his 
gratification  at  the  recognition  given  by  the  credit  men 
to  character  as  a  basis  for  credit.  At  that  point  he  drew 


CHARACTER  AS  A  CREDIT  ASSET       33 

from  his  pocket  a  newspaper  clipping  and  read  from  it, 
with  approval,  a  part  of  the  examination  of  J.  P.  Morgan 
before  the  investigation  committee  above  referred  to.  As 
he  read  the  statement  of  Mr.  Morgan  concerning  the 
giving  of  a  check  for  a  million  dollars  to  a  man  whose 
only  asset  was  character,  he  paused,  and  in  a  tone  of 
longing  and  regret,  exclaimed,  "How  I  wish  I  had  known 
that  before  Morgan  died !"  His  manner  expressed  a  con- 
viction on  his  part  that  with  the  death  of  Mr.  Morgan 
that  class  of  bankers  had  become  extinct.  He  also  men- 
tioned the  fact  that  he  himself  in  times  past  had 
endeavored  occasionally  to  establish  credit  relations  with 
bankers,  but  he  said  they  always  introduced  him  to  a 
fourth  C,  which  they  said  stood  for  "Collateral."  The 
merriment  in  the  convention  showed  hearty  appreciation 
of  the  point  he  had  in  mind. 

What  has  been  said  above  is  not  meant  to  imply  any 
question  as  to  the  value  of  character  as  an  asset.  The 
object,  rather,  is  to  call  attention  to  the  difficulty  in 
recognizing  and  identifying  genuine  character  in  the 
applicant  for  credit,  and  to  prepare  the  student  for  the 
careful  and  searching  analysis  that  is  necessary  in  reach- 
ing the  correct  conclusion  in  such  an  investigation. 

A  noted  writer  on  credit,  dealing  with  this  part  of  the 
subject,  has  expressed  it  as  follows:  "Only  business  men 
have  credit  in  a  commercial  sense,  and  it  is  not  the  moral 
character  of  a  person  which  gives  him  credit,  but  his 
business  reputation."  Such  a  reputation  is  founded  not  on 
the  opinion  of  others,  but  on  the  test  of  years  of  actual 
record  and  performance. 

Evidences  of  Character  in  Past  Record 

A  philosopher  or  essayist  of  the  New  England  school 
has  said  in  substance :  That  which  is  counted  for  virtue  in 


34  MERCANTILE  CREDITS 

many  men,  is  merely  the  absence  of  temptation.  If  this  is 
accepted  as  true,  it  will  only  add  to  the  difficulty  of  the 
problem;  it  is  highly  important  to  keep  it  in  mind  as  a 
possible  factor. 

In  looking  through  a  credit  file  for  evidences  of 
character,  if  the  applicant  for  credit  has  been  in  business 
and  established  a  record,  the  search  will  involve  finding 
an  answer  to  such  questions  as  these : 

1.  How  does  he  pay  his  accounts?    Are  any  of  them 
past  due?    If  so,  why?    Is  there  anything  to  indicate  an 
unwillingness  to  meet  his  obligations?     The  answer  to 
these  inquiries  will  show  purpose  or  intent. 

2.  Is  there  in  the  record  any  indication  of  fraud  or 
dishonesty?    If  so  it  will  be  better  to  decline  that  order 
or  sell  only  for  cash. 

3.  Has  he  failed  in  any  previous  undertaking?    Was 
there  any  question  of  fraud  raised  in  connection  with  that 
failure?    If  so  it  is  like  finding  the  germ  of  disease  in  a 
diagnosis.    He  cannot  pass  the  character  test. 

Applicant  Without  Previous  Record 

If  the  applicant  has  had  no  previous  business  record, 
the  examination  must  proceed  along  somewhat  different 
lines.  What  positive  facts  are  to  be  found  in  the  ex- 
amination at  hand  which  will  throw  any  light  on  the 
character  of  the  risk?  What  are  his  habits?  On  this 
point  something  can  be  learned  from  his  neighbors, 
though  they  as  a  rule  mention  only  such  things  as  are 
favorable.  They  are  not  apt  to  say  anything  savoring  of 
criticism,  especially  in  written  form,  even  when  there  may 
be  reasons  for  an  adverse  report.  The  mercantile  agency 
reports  are  apt  to  manifest  some  reticence  also  in  giving 
information  on  this  phase  of  the  question.  They  may  go 
so  far  as  to  say  his  habits  are  subject  to  criticism,  and 


CHARACTER  AS  A  CREDIT  ASSET       35 

when  they  do,  the  statement  carries  a  significance  which 
should  not  be  ignored.  Does  he  drink  or  gamble  ?  Neither 
of  these  habits  go  with  a  good  business  character.  What 
are  his  interests,  occupations,  or  amusements,  outside  of 
business?  Will  his  associations  be  helpful  to  him  in  his 
business?  On  such  points  it  is  quite  important  to  feel 
that  we  know  the  man. 

Assuming  that  the  applicant  has  accumulated  no  cap- 
ital or  resources  in  his  business,  but  must  depend  on  pay- 
ing for  his  purchases  out  of  the  proceeds  of  the  sale  of 
the  merchandise,  he  becomes  strictly  a  moral  risk;  for  it 
is  known  that  honesty  of  itself  cannot  pay  obligations, 
no  matter  how  good  the  intention  may  be.  It  then  be- 
comes necessary  to  ask:  What  will  the  applicant  do  if 
he  has  a  bad  season  and  is  unable  to  dispose  of  the  mer- 
chandise purchased  as  he  expected  to  do?  What  will  he 
do  if  he  becomes  ill  for  a  month  or  two  and  is  unable  to 
look  after  his  business?  What  will  he  do  if  some  unex- 
pected disaster  befalls  his  business,  making  it  impossible 
to  meet  his  purchase  contracts?  What  will  he  do  if  some 
member  of  his  family  must  go  to  a  hospital  for  an  ex- 
pensive operation? 

Courses  of  Action  in  Times  of  Embarrassment 

If  any  of  these  or  similar  troubles  befall  him,  will  he 
advise  his  creditors  frankly  as  to  his  situation,  offer  se- 
curity through  the  indorsement  of  some  friend  or  relative, 
or  propose  to  pay  up  in  full  if  he  is  given  a  sufficient  ex- 
tension on  his  indebtedness?  Or,  on  the  other  hand,  will 
he  go  first  to  his  attorney  with  his  difficulties,  and  on  that 
gentleman's  advice  have  a  letter  sent  out,  in  the  customary 
form,  stating  that  he  finds  himself  financially  embarrassed 
and  unable  to  meet  his  obligations,  and  then  either  call  a 
meeting  of  his  creditors  for  a  certain  date  (probably  at 


36  MERCANTILE  CREDITS 

the  attorney's  office)  or  submit  an  offer  to  settle  his  in- 
debtedness at  30  cents  on  the  dollar,  coupled  with  the 
suggestion  that  if  the  settlement  offer  is  not  accepted  by 
all  creditors,  there  will  be  no  alternative  except  riling  a 
petition  in  bankruptcy? 

Which  of  the  above  methods  offers  the  more  satisfac- 
tory or  positive  indication  of  real  honesty  and  sound  busi- 
ness character?  The  question  answers  itself;  but  in  the 
experience  of  credit  men,  which  is  the  course  more  fre- 
quently followed  by  merchants? 

This  is  not  merely  drawing  a  pessimistic  picture.  All 
the  possibilities  here  mentioned  are  things  that  befall  mer- 
chants with  some  degree  of  frequency.  The  credit  man  in 
passing  on  the  moral  risk  will  be  forced  to  realize  that 
when  such  a  man  is  tried  out  by  actually  losing  money  in 
his  business,  and  is  facing  the  fact  that  his  family  may 
come  to  want,  he  is  meeting  the  acid  test  of  character. 
Will  he  yield  to  the  temptation  to  use  the  money  of  his 
creditors  in  order  to  save  them  and  himself  from  the 
results  of  his  misfortune? 

Difficulties  in  Judging  Moral  Risk 

A  western  merchant  of  limited  resources  very  recently 
furnished  an  illustration  of  what  may  happen  in  such  a 
case.  His  only  daughter  became  ill  and  he  was  told  that 
the  only  chance  of  saving  her  life  was  to  take  her  to  New 
York  City  for  an  operation  by  a  noted  surgeon.  He  at 
once  followed  this  advice  at  a  cost  of  about  $1,500. 
When  he  returned  home  he  notified  his  creditors  of  the 
circumstances  and  proposed  to  settle  his  indebtedness  at 
25  cents  on  the  dollar.  The  creditors  investigated,  found 
that  the  money  had  been  spent,  that  he  had  no  resources 
from  which  to  pay  in  full,  and  promptly  accepted  his 
offer. 


CHARACTER  AS  A  CREDIT  ASSET  37 

This  incident  may  not  in  any  way  prove  this  merchant 
lacking  in  character,  but  it  is  submitted  as  showing  the 
possibilities  that  are  inherent  when  extending  credit  to  the 
moral  risk. 

Moral  Risk  Club 

A  number  of  years  ago  there  was  organized  in  Chi- 
cago, by  a  group  of  credit  men  representing  a  certain  line 
of  trade,  a  society  which  they  call  the  "Moral  Risk  Club." 
The  membership  comprises  all  the  credit  men  of  this  one 
particular  kind  of  business.  They  hold  their  meetings  at 
lunch  time.  They  have  tabulated  all  the  dealers  to 
whom  they  are  selling  and  who  do  not  have  capital  and 
therefore  are  extended  credit  on  their  character  as  the 
only  asset,  which  brings  them  within  the  definition  of 
the  "moral  risk/'  At  each  meeting  this  list  is  dis- 
cussed and  the  condition  of  such  accounts  with  each 
member  house  of  the  club  is  shown  and  carefully  scruti- 
nized. 

A  member  of  the  club  stated  that  they  considered  the 
organization  a  necessity  in  their  line,  because  the  exten- 
sion of  credit  to  their  class  of  dealers  on  the  character 
asset  alone,  without  keeping  very  close  watch  on  such 
risks,  would  be  dangerous  and  result  in  undue  losses. 
They  have,  therefore,  mobilized  their  forces  and  maintain 
the  program  of  constant  vigilance  "against  the  common 
enemy."  The  search-light  of  daily  investigation  is  kept 
constantly  directed  at  these  accounts. 

The  existence  of  this  club  does  not  furnish  an  argu- 
ment against  the  character  asset,  because  the  club  mem- 
bers are  constantly  selling  risks  of  that  class.  It  does, 
however,  strongly  emphasize  the  difficulty  of  recognizing 
and  positively  identifying  character,  and  being  sure  that 
it  is  in  evidence. 


38  MERCANTILE  CREDITS 

Relative  Importance  of  Character 

What  then  is  the  value  of  character  as  a  credit  basis? 
Is  it  not  limited  to  representing  a  willingness,  a  desire  al- 
ways to  pay  100  cents  on  the  dollar?  But  is  it  not  also 
modified  always  by  the  possibility  that  the  possessor  of 
character  alone  may  be  tempted  under  the  stress  of  some 
business  disaster  to  use  his  creditors*  money?  If  this  is 
possible,  it  is  a  limitation  on  this  factor  of  the  credit 
equation  which  should  not  be  lost  sight  of  in  passing  on 
risks  of  this  class. 

The  credit  man  should  keep  this  thought  before  him: 
Honesty,  character,  as  an  abstract  moral  endowment, 
will  not  pay  an  account.  The  customer  will  have  to  get 
the  cash  to  do  that.  Where,  when,  and  how  can  he  get  it  ? 

The  Real  Basis  of  Credit 

In  a  monthly  letter  issued  by  the  National  Association 
of  Credit  Men  to  its  members  in  the  year  1921,  while  the 
readjustment  of  conditions  resulting  from  the  World 
War  was  in  progress,  the  fluctuations  of  exchange  values 
was  discussed  and  the  question  was  asked :  "Why  should 
fiat  money  not  circulate  at  par?"  A  portion  of  the 
answer  to  this  inquiry,  as  set  forth  in  that  letter,  is  here 
quoted : 

This  question  leads  to  a  consideration  of  what  credit  really  is, 
and  how  the  value  of  a  credit  instrument  fluctuates  according  to 
its  underlying  value.  A  promise  is  made  to  pay  a  certain  sum  of 
money  at  a  specified  time,  and  for  the  liquidation  of  an  account 
for  commodities  bought  and  delivered.  What  is  the  value  of  this 
credit?  No  more,  no  greater  than  the  commodities  underlying  it, 
plus  the  financial  abilities;  and  when  the  underlying  commodities 
are  disposed  of  or  consumed,  then  the  value  of  the  credit  dimin- 
ishes and  may  become  nil. 

Every  credit  student  will  probably  yield  mental  assent 


CHARACTER  AS  A  CREDIT  ASSET       39 

to  the  logic  01  the  above  answer,  and  tne  real  import  01 
it  may  well  be  kept  in  mind  when  passing  upon  a  credit 
risk  which  has  no  capital  as  an  underlying  basis,  which 
has  not  demonstrated  capacity  or  experience,  and  there- 
fore seems  to  depend  mainly  on  character  as  an  asset. 


CHAPTER  IV 

THE  CREDIT  DEPARTMENT  AND  THE 
BUSINESS 

Three  Principal  Departments 

In  every  house  or  firm  well  organized  for  efficiency, 
and  especially  where  a  considerable  volume  of  business  is 
handled,  there  are  three  departments,  very  closely  allied 
in  the  plan  of  operation.  In  the  larger  firms  these  depart- 
ments will  be  under  separate  management.  In  the  smaller 
firms  one  man  may  be  in  charge  of  two  or  possibly  all 
three  of  these  divisions.  But  whatever  plan  of  organiza- 
tion may  be  in  operation,  the  same  principles  or  policies 
should  govern  in  effect. 

The  three  departments  are  the  following : 

1.  The  purchasing  department,  which  selects  or  provides 

the  merchandise  to  be  handled  by  the  house,  or, 
in  the  case  of  a  manufacturing  concern,  purchases 
the  material  and  determines  the  character  of  the 
product  to  be  marketed. 

2.  The  sales  department,  which  disposes  of  the  merchan- 

dise or  manufactured  product,  converting  it  into 
accounts  receivable,  and  at  certain  seasons  of  the 
year  placing  possibly  the  entire  capital  of  the 
firm  in  the  hands  of  the  customers  of  the  house, 
represented  by  the  accounts  on  the  ledgers. 

3.  The  credit   department,   which  determines  in  what 

hands  these  accounts  are  to  be  placed,  takes  control 
of  them,  and  assumes  the  responsibility  of  con- 
verting  these   accounts   into    cash   and   restoring 
40 


THE  CREDIT  DEPARTMENT  41 

them  again  to  the  working  capital  through  the 
bank  account. 

It  devolves  on  the  sales  department  to  see  that  all 
merchandise  purchased  and  all  products  of  manufacture 
are  disposed  of ,  so  that  no  loss  may  result  from  unsold  or 
unsalable  stocks  that  may  remain  on  hand  at  the  close  of 
the  season.  It  rests  with  the  credit  department  to  make 
sure  that  all  the  accounts  thus  created  are  paid  at  ma- 
turity, and  that  losses  from  bad  debts  and  failure  to  collect 
these  outstandings  are  eliminated,  or  reduced  to  the  lowest 
possible  minimum.  The  result  will  test  the  working  effi- 
ciency of  the  department. 

Importance  of  Departmental  Co-operation 

It  will  be  seen  as  a  self-evident  proposition  that  the 
three  departments  must  be  co-ordinated  in  their  operation 
and  made  to  work  together  smoothly,  for  the  accomplish- 
ment of  one  primary  purpose  or  object,  viz.,  that  the  firm 
shall  make  money,  because  that  is  the  dominating  reason 
for  its  being  in  business. 

It  is  the  duty  of  the  executive,  the  manager,  or  the 
successful  merchant,  as  the  case  may  be,  to  be  sure  that 
this  perfect  co-operation  exists  and  that  this  underlying 
objective  of  the  enterprise  is  attained.  It  is  this  power  of 
accomplishment  which  leads  to  the  generally  accepted  defi- 
nition of  the  word  "merchant,"  referred  to  in  a  previous 
chapter,  "The  man  who  can  buy  and  sell  goods  success- 
fully." 

In  such  a  well-balanced  organization  the  purchasing 
department  will  consult  with  the  sales  department  in  buy- 
ing or  producing  that  which  is  to  be  sold,  for  the  sales  end 
of  the  business  should  be  well  informed  as  to  what  is 
in  demand,  and  have  a  well-developed  idea  of  what  will 
be  a  salable  line  of  goods;  and  it  is  reasonable  that  it 


42  MERCANTILE  CREDITS 

should  have  some  voice  in  selecting  that  which  it  will 
be  required  to  dispose  of  in  the  market. 

In  a  similar  degree  the  credit  department  should  have 
a  determining  voice  in  deciding  what  accounts  shall  be 
taken  on  in  the  selling  process,  for  it  will  be  charged 
with  the  responsibility  of  collecting  these  accounts  at 
maturity.  The  sales  department  is  not  willing  to  be 
loaded  down  with  unsalable  merchandise,  and  the  credit 
department  should  not  be  expected  to  assume  difficult  or 
perhaps  impossible  problems  in  the  handling  of  accounts 
which  from  the  beginning  are  probably  uncollectible. 

The  necessity  for  team  work  and  perfect  harmony, 
as  well  as  co-operation  between  all  departments,  needs 
no  argument.  It  will  be  an  ideal  situation  if  the  credit 
department  is  considered  an  auxiliary  of  the  sales  depart- 
ment, and,  conversely,  that  every  member  of  the  sales 
force  is  in  working  spirit  a  member  of  the  credit  depart- 
ment. For,  just  as  the  sales  department  must  move  the 
goods  and  not  allow  unsalable  stocks  to  accumulate,  so 
also  the  credit  department  must  keep  the  books  clear  of 
past-due  and  bad  accounts,  and  reduce  the  bad  debt  loss 
to  a  minimum.  This  is  a  very  important  function  for 
both  departments.  Too  much  capital  tied  up  in  either 
merchandise  or  past-due  accounts  creates  an  unhealthy 
congestion  in  the  business. 

Maintaining  Standard  of  Credit 

The  modern  credit  department  is  an  effort  to  put 
credit-granting  on  a  more  scientific  basis  in  these  days 
of  lessening  profits  and  increasing  competition.  It  is 
necessary  to  raise  the  standard  of  credit,  for  it  is  gen- 
erally conceded  that  in  the  United  States  credit  is  held 
too  cheaply.  Greater  conservatism  is  being  urged  as  to 
our  annual  fire  loss.  The  same  reasoning  should  be  ap- 


THE  CREDIT  DEPARTMENT  43 

plied  to  our  annual  "bad  debt"  loss.  The  losses  from 
both  these  causes  are  enormous  and  they  place  a  tax  or 
strain  on  our  commerce,  which  it  should  not  have  to  bear. 

Co-operation  Between  Credit  and  Sales  Departments 

In  the  carrying  out  of  the  policy  of  co-operation  be- 
tween the  departments  as  here  advocated,  difficult  prob- 
lems may  sometimes  be  encountered,  growing  out  of  two 
varying  causes:  (i)  the  character  of  the  line  of  goods 
being  handled  or  produced,  and  the  conditions  under  which 
they  must  be  marketed;  (2)  the  business  policies  which 
some  houses  may  at  times  find  it  necessary  to  follow  in 
disposing  of  their  merchandise  or  products. 

In  some  lines  it  may  be  necessary  to  market  the  stock 
before  the  end  of  the  season  because  of  unavoidable  loss 
if  carried  over.  A  change  in  fashion  or  style,  or  some 
other  cause,  might  make  this  stock  worth  one-fourth 
of  its  cost,  or  less,  if  carried  into  another  year. 

Such  a  situation  may  bring  about  a  consultation  be- 
tween sales  and  credit  management  on  this  problem. 
Which  is  better :  to  carry  the  stock  and  let  the  inventory 
show  the  loss  because  of  depreciation  of  value,  or  to  force 
the  goods  on  the  market  regardless  of  the  credit  risk  and 
let  the  result,  if  it  comes  through  failure  to  collect  the 
accounts,  be  shown  through  the  bad  debts  charged  to 
profit  and  loss  account  ? 

Such  a  situation  may  not  often  arise,  but  when  the 
issue  must  be  met  the  credit  men  should  argue  against 
the  latter  course  because  of  the  demoralizing  effect, 
through  lowering  the  standard  of  credit,  which  may  be  far 
reaching.  Better  put  the  merchandise  on  the  bargain 
counter  and  close  out  in  job  lots  than  violate  the  prin- 
ciples of  credit-granting.  The  sales  department  wishes  to 
avoid  the  demoralization  of  the  market  on  prices.  But 


44  MERCANTILE  CREDITS 

if  merchants  are  oversold  and  failures  result,  the  same 
effect  on  market  demand  and  prices  may  come  about 
through  slaughter  sales  of  the  same  merchandise  in  the 
form  of  bankrupt  stocks.  It  becomes  a  question  of  busi- 
ness policy,  in  which  the  credit  situation  should  not  be 
overlooked. 

Harmonizing  Conflicting  Conditions 

Sometimes  the  struggle  for  business  against  keen  com- 
petition leads  the  sales  department  to  urge  the  acceptance 
of  orders  on  poor  credit  ratings  in  order  to  get  enough 
volume  to  meet  overhead  expense.  This  makes  a  hard 
problem  for  the  credit  man,  but  he  should  insist  that 
such  transactions  be  treated  as  special  cases  if  the  orders 
are  accepted,  and  that  they  be  OK'd  by  the  sales  de- 
partment or  the  executive  head,  not  as  wise  credit-grant- 
ing but  as  a  concession  to  business  policy  or  to  reduce 
ratio  of  expense.  A  wise  manager  or  employer  will  not 
urge  his  credit  department  to  abandon  rule  and  formula, 
the  study  of  cause  and  effect,  or  the  observance  of  those 
laws  which  are  demonstrated  by  the  results  of  experience. 
He  will  rather  continue  to  urge  a  striving  for  that  exact- 
ness in  the  credit  work  which  makes  it  conform  with  the 
requirements  of  scientific  methods.  It  is  not  always  an 
easy  task  to  harmonize  these  conflicting  conditions  but  it 
is  a  consummation  devoutly  to  be  wished  for. 

An  Illustration  of  Stock  Sacrificing 

In  the  year  1920  a  jobbing  house  in  a  certain  line, 
having  a  capital  of  about  $250,000,  found  at  the  close  of 
the  spring  season  that  its  merchandise  on  hand  was  be- 
tween $400,000  and  $500,000.  The  fall  in  prices  which 
accompanied  the  readjustment  of  war  values  was  begin- 
ning to  get  under  way,  and  no  one  could  accurately  judge 


THE  CREDIT  DEPARTMENT  45 

the  level  to  which  the  decline  might  reach.  A  consulta- 
tion was  held  and  the  decision  made  that  the  stock  on  hand 
must  be  closed  out  immediately  to  escape  further  depreci- 
ation, and  that  program  was  vigorously  carried  out.  It 
was  also  decided  that  no  undue  risk  should  be  taken  in 
granting  cradits,  but  that  reduction  in  price  regardless  of 
cost  should  be  the  inducement  for  moving  the  goods 
quickly.  The  future  of  credits  was  at  that  time  decidedly 
unfavorable. 

As  a  result  of  this  policy  this  house  closed  the  year 
with  a  comparatively  low  inventory,  with  all  banking  and 
merchandise  indebtedness  paid  in  full,  and  a  large  cash 
balance  in  the  bank.  In  this  process  the  inventory  neces- 
sarily showed  a  heavy  loss,  for  orders  had  been  shipped 
and  goods  forced  upon  the  house  on  which  deliveries 
had  not  been  expected  at  the  time  specifications  were 
placed  because  of  the  great  shortage  in  the  particular  line 
of  merchandise  that  was  supposed  to  exist  at  the  time 
the  purchases  were  arranged  for.  It  took  courage  to 
sacrifice  the  stock  without  abandoning  the  rules  govern- 
ing wise  credit-granting,  but  as  a  matter  of  good  mer- 
chandising judgment  it  proved  to  be  a  wise  policy.  This 
house  was  placed  in  position  to  buy  for  cash  new  goods 
at  the  reduced  prices  to  meet  its  requirements  for  the 
next  season. 


CHAPTER  V 

THE  CREDIT  FILE— REPORTS  OF  SALESMEN 
AND  COMMERCIAL  AGENCIES 

Thorough  Investigation  Essential 

In  a  previous  chapter  the  information  desired  concern- 
ing the  applicant  for  credit  was  set  forth  with  sufficient 
detail  to  indicate  the  salient  facts  that  have  a  bearing 
in  his  case.  The  methods  and  processes  by  which  this 
information  shall  be  obtained,  and  the  sources  which 
should  be  used  in  procuring  all  the  facts  that  are  avail- 
able, must  be  now  carefully  considered. 

From  the  beginning  the  importance  of  this  investiga- 
tion has  been  recognized,  and  it  has  been  tersely  expressed 
in  a  dictum  which  has  appealed  forcefully  to  all  dispensers 
of  credit :  "The  strength  of  the  credit  man  is  knowledge." 
-This  means  that  too  much  information  can  never  be  se- 
cured. There  is  always  the  possibility  that  some  domi- 
nating or  important  fact,  vital  to  a  correct  decision,  may 
not  be  discovered.  Therefore  the  investigation  should 
be  searching  and  thorough. 

Salesmen's  Reports 

The  salesman's  report  logically  comes  first  as  a  source 
of  credit  information,  because  it  should  accompany  all 
first  orders  from  new  customers.  The  importance  of  this 
report  is  apparent  from  the  fact  that  a  majority  of  houses 
furnish  salesmen  with  a  blank  form  to  be  filled  out  and 
sent  in  with  such  orders.  The  salesman  is  the  only  one 

46 


REPORTS   OF   SALESMEN   AND   AGENCIES        47 

connected  with  the  firm  that  may  ever  have  the  opportu- 
nity to  meet  the  customer  personally.  Therefore,  he  should 
become  eyes  for  the  credit  department  and  make  his  re- 
port with  that  fact  in  mind. 

The  credit  department  must  keep  in  mind  that  the 
main  purpose  of  the  salesman  is  to  sell  merchandise.  The 
salesman  is  usually  a  firm  believer  in  that  doctrine,  and 
his  co-operation  must  be  secured  in  the  matter  of  sending 
in  the  credit  reports.  In  securing  his  assent  it  is  well  to 
have  him  realize  that  usually  he  is  required  to  make 
only  one  report  on  a  customer,  and  that  is  when  the  re- 
port counts  for  the  most,  viz.,  with  the  first  order.  After 
that  the  information  he  is  asked  to  furnish  will  be  called 
for  only  in  an  incidental  way,  or  when  the  customer  may 
begin  to  be  slow  pay,  making  a  file  revision  necessary. 

Further,  if  the  salesman  is  on  a  commission  basis,  in 
whole  or  in  part  (and  the  majority  of  them  are),  anything 
he  can  do  to  aid  in  a  quick  and  favorable  decision  on  the 
order  in  hand  adds  to  the  volume  of  his  earnings.  Be- 
cause the  salesman  is  busy  on  the  selling  proposition  it 
is  a  good  policy  to  make  his  work  on  credit-reporting  as 
convenient  and  easy  as  possible.  Some  houses  use  forms 
requiring  quite  an  amount  of  detail,  which  the  salesman 
could  answer  only  after  making  an  investigation  through 
many  different  sources.  This  may  take  too  much  time 
or  embarrass  him  with  his  customer  to  the  point  of  dis- 
couragement. 

Simple  Form  Preferable 

The  form,  therefore,  should  call  for  such  facts  as 
usually  can  be  learned  only  through  the  salesman,  and 
such  as  the  salesman  can  obtain  readily  by  observation 
and  through  casual  conversation  while  taking  the  order,  or 
through  incidental  inquiries  in  other  directions  after  he 


48  MERCANTILE  CREDITS 

is  through  selling  the  customer.     A  reasonable  form  of 
report  would  include  these  items : 

1.  Name  of  firm. 
Town  and  state. 

2.  How  long  in  business. 

3.  Kind  of  business. 

4.  Estimated  value  of  stock. 

5.  Amount  of  capital. 

6.  Careful  buyer. 

7.  Location  good. 

8.  Competition. 

9.  Is  stock  well  kept? 

10.  Banks  with. 

11.  Buys  from. 

12.  General  reputation. 

These  questions,  when  answered  with  reasonable  ac- 
curacy, will  frequently  give  enough  facts  to  enable  the 
credit  man  to  decide  on  the  order,  if  it  is  not  too  large, 
especially  after  getting  reports  from  the  bank  and  from 
the  other  houses  named  who  have  been  selling  this  mer- 
chant. It  is  important  to  have  the  salesman  get  the  name 
of  the  customer's  bank,  as  otherwise  that  information  may 
not  be  obtained  for  a  considerable  period.  It  will  be  ap- 
parent also  that  the  above  questions  cover  some  facts 
that  would  not  be  readily  obtainable  through  other  sources. 

If  the  amount  of  capital  invested  and  the  stock  on 
hand  are  relatively  the  same,  it  will  suggest  to  the  credit 
department  that  there  may  be  a  lack  of  working  capital 
and  that  it  is  necessary  to  know  more  about  the  case  be- 
fore deciding. 

Reviewing  Customers'  List  with  Salesmen 

Most  houses  have  salesmen  go  over  their  route  book 
or  customers'  list  with  the  credit  manager  at  least  twice 
a  year.  Usually  this  is  before  the  salesmen  start  out  on 


REPORTS   OF   SALESMEN   AND   AGENCIES        49 

the  spring  or  fall  trips.  This  plan  offers  many  advan- 
tages. It  gives  opportunity  both  to  get  and  give  infor- 
mation as  each  account  is  discussed,  and  to  make  the 
salesman  feel  that  the  credit  department  can  aid  him  in 
getting  business.  This  may  secure  a  more  willing  co- 
operation from  him. 

On  one  occasion  a  salesman  for  a  certain  house  in 
reporting  from  a  town  in  his  territory,  said :  "Our  dealer 
Williams  was  out  in  Washington.  I  did  not  see  him." 

This  merchant  at  that  time  had  not  discounted  and  was 
beginning  to  be  slow  on  his  account  for  the  previous  sea- 
son. In  going  over  the  list  with  the  salesman  for  the  fall 
trip,  the  credit  man,  having  a  memorandum  of  the  last 
report,  said,  "Williams  was  out  in  Washington  when  you 
made  this  town.  What  was  he  doing?  Hunting,  fishing, 
or  on  a  vacation?" 

The  salesman  replied,  "No,  he  owns  an  apple  orchard 
out  there,  and  he  went  out  to  arrange  for  shipping  the 
crop  to  market.  He  will  have  ten  or  twelve  carloads  to 
sell." 

A  little  figuring  showed  that  at  prevailing  prices  the 
crop  ought  to  net  him  $8,000  to  $10,000.  This  was  con- 
siderably more  than  the  merchant's  capital  rating  and 
made  his  prospects  seem  quite  favorable.  There  was 
nothing  in  any  reports  contained  in  the  credit  file  to  show 
that  he  owned  an  apple  orchard  and  the  salesman  had  not 
previously  thought  of  mentioning  that  item. 

In  the  same  interview  with  the  salesman,  when  another 
town  was  reached,  the  credit  man  said:  "This  merchant 
is  behind  on  his  payments  to  such  an  extent  that  you 
had  better  not  try  to  sell  him  on  this  trip;  let  him  catch 
up  first." 

The  salesman  replied :  "There  is  no  reason  to  be 
afraid  of  him.  I  learned  on  my  last  visit  there  that  he 


50  MERCANTILE  CREDITS 

is  one  of  the  heirs  to  quite  an  estate.  The  division  is 
about  to  be  made,  and  he  will  receive  his  share  in  cash." 
The  amount  named  was  quite  a  sum. 

There  was  nothing  in  the  file  information  to  indi- 
*  cate  this  inheritance,  and  here  again  the  salesman  had  not 
thought  of  it  as  an  item  worth  mentioning.  He  con- 
sidered it  sufficient  that  he  knew  of  it,  but  the  credit 
man  at  once  got  a  memorandum  of  it  into  his  credit  file. 

Salesmen  in  many  cases  have  advance  information  on 
many  circumstances  affecting  customers  favorably  or  un- 
favorably, and  frequent  conferences  with  the  credit  de- 
partment bring  such  items  to  the  surface.  At  the  same 
time  the  salesman  gets  a  different  view  as  to  the  impor- 
tance of  these  items  in  aiding  to  correct  credit  decisions 
and  he  sees  a  good  reason  for  co-operation  with  the  credit 
department  on  such  details.  Every  such  consultation  or 
interview  should  result  in  establishing  closer  and  more 
harmonious,  as  well  as  helpful,  relations  between  the 
credit  and  sales  departments. 

Commercial  Agency  Ratings 

It  is  safe  to  say  that  in  passing  on  credits  at  the 
present  time,  the  credit  department  turns  either  involun- 
tarily or  unconsciously  first  of  all  to  the  rating  books  or 
to  the  special  reports  of  the  two  leading  agencies,  Dun 
and  Bradstreet.  Each  of  these  agencies  has  been  render- 
ing these  two  services  to  the  commercial  world  for  ap- 
proximately eighty  years,  and  they  have  come  to  be  re- 
garded as  the  dictionaries  or  encyclopedias  of  credit.  It 
is  probably  conservative  to  estimate  that  in  most  lines  of 
business  75  per  cent  of  the  credits  are  passed  on  the 
capital  and  credit-ratings  assigned  by  these  agencies,  taken 
in  connection  with  the  special  reports  which  they  furnish. 
These  ratings  are  based  on  the  capital  resources  and  man- 


REPORTS   OF   SALESMEN   AND   AGENCIES        51 

ner  of  payment  of  the  firms  reported  on,  and  consider- 
ation of  this  fact  seems  to  lead  inevitably  to  the  conclu- 
sion that  capital  is  considered  to  be  the  most  important 
basis  for  credit. 

Character    of     Service     Rendered    by    Commercial 
Agencies 

It  is  not  likely  that  these  two  leading  agencies  will 
have  any  competition  in  their  field  of  activity  in  the  near 
future.  They  are  now  each  reporting  on  over  two  mil- 
lion firms  in  business.  In  the  past  thirty  years  all  other 
agencies  endeavoring  to  furnish  a  similar  service  have 
practically  abandoned  their  undertaking  and  retired  from 
the  field.  It  is  a  question  whether  any  new  agency 
could  begin  now,  and  in  a  short  time,  or  at  once,  be 
able  to  perfect  such  an  organization  as  would  be  necessary 
to  render  such  service  as  these  older  agencies  are  supply- 
ing. They  have  expanded  their  business  gradually  through 
a  long  term  of  years,  and  have  met  the  requirements  of  a 
vast  increase  in  the  volume  of  our  national  commerce  in 
an  adequate  manner  and  in  a  progressive  spirit.  It  would 
require  an  enormous  capital  and  the  establishment  of  a 
great  working  force  or  organization  to  enter  the  field  pre- 
pared to  furnish  immediately  the  same  service,  on  about 
two  million  names,  that  the  older  agencies  have  evolved 
through  long  years  of  growth  and  experience. 

One  writer  on  credit,  in  considering  the  question, 
makes  this  comment: 

The  fact  of  the  failure  of  other  attempts  to  successfully  de- 
velop mercantile  agencies  has  given  to  the  Dun  and  Bradstreet 
companies  a  reputation  for  solidarity  and  superiority  that  accounts 
to  a  great  extent  for  the  fame  and  prestige  they  have  enjoyed  for 
so  many  years.1 

*W.  A.   Prendergast,  "Credit  and  Its  Uses." 


52  MERCANTILE  CREDITS 

Extent  of  Service 

When  we  consider  the  scope  and  magnitude  of  the 
task  of  reporting  on  the  credit  standing  of  more  than 
two  million  firms  in  our  48  different  states  and  our  depen- 
dencies, as  well  as  in  Canada,  and  the  further  fact  that 
these  reports  and  ratings  are  nearly  always  relatively  cor- 
rect, we  can  better  appreciate  what  is  involved  in  the 
management  of  such  great  enterprises  with  their  army 
of  employees,  traveling  representatives,  and  local  re- 
porters. We  get  also  an  idea  of  the  phenomenal  growth 
of  business  in  our  nation  when  we  consider  that  the  num- 
ber of  firms  being  reported  on  has  doubled  in  the  last 
twenty  years. 

These  agencies  have  borne  their  part  well  in  our  com- 
mercial expansion.  When  we  were  a  new  and  sparsely 
settled  country  there  was  a  strong  demand  for  credit. 
Merchants  and  manufacturers  were  glad  to  extend  credit 
to  the  pioneers  who  were  opening  up  and  developing  this 
new  country,  for  it  was  to  be  their  future  market.  The 
agencies  expanded  their  organization,  followed  these 
pioneers,  and  furnished  to  the  merchants  and  manufac- 
turers the  information  on  which  credit  could  be  based. 
They  were  of  invaluable  assistance  in  promoting  our 
commercial  progress. 

They  have  not  been  content  with  covering  all  sections 
of  our  own  country,  but  in  order  to  aid  in  our  foreign 
trade  they  have  covered  the  world,  either  through  their 
own  branches  or  by  establishing  connections  with  similar 
organizations  in  foreign  countries. 

They  have  rendered  another  valuable  service  by  pub- 
lishing, voluntarily  and  gratuitously,  weekly  reviews  of 
trade  and  financial  conditions  which  have  been  and  are 
valuable  as  market  information.  These  publications  might 
be  considered  good  advertising  for  the  agencies,  but  never- 


REPORTS   OF   SALESMEN   AND   AGENCIES        53 

theless  they  have  been  a  very  much  appreciated  aid  to 
business. 

The  use  made  by  the  sales  department  of  the  rating 
books  in  preparing  mailing  lists  of  merchants  for  solicit- 
ing business  is  alone  worth  the  subscription  price  of 
the  agency  service. 

The  importance  of  these  agencies  in  credit-granting 
may  be  more  clearly  realized  perhaps  should  credit  men 
endeavor  to  picture  the  situation  that  would  exist  if  this 
service  were  suddenly  discontinued.  What  could  be  found 
as  a  substitute? 

Lack  of  Promptness  in  Reporting 

Notwithstanding  the  recognition  of  the  benefits  of 
agency  service,  credit  men  find  some  things  in  it  to 
criticize.  Perhaps  the  most  unsatisfactory  feature  is  the 
lack  of  promptness.  This  is  a  handicap  on  new  accounts 
and  first  orders,  especially  with  firms  just  starting  in 
business,  and  in  the  case  of  orders  requiring  prompt  ship- 
ments. It  may  frequently  happen  that  such  orders  are 
acted  upon  and  the  goods  shipped  quite  a  while  before  the 
agency  reports  come  in,  the  decision  being  made  on  infor- 
mation received  from  other  sources. 

The  agencies  reply  to  this  criticism  by  saying  that  it 
takes  time  to  investigate  and  furnish  such  a  report  as 
will  insure  the  greater  accuracy  which  credit  men  are 
asking  for.  Some  reports  can  be  made  up  quickly. 
Others  require  much  investigation  before  all  the  facts  can 
be  obtained  which  are  necessary  to  a  good  reliable  re- 
port. This  is  true;  but  the  fact  remains  that  such  a  de- 
layed report  can  only  be  useful  or  available  on  future 
orders.  Therefore,  the  prompt,  up-to-date  information 
obtained  from  other  sources  is  becoming  of  increasing 
importance. 


54  MERCANTILE  CREDITS 

Securing  Signed  Financial  Statements 

There  is  also  complaint  that  special  reports  do  not 
seem  to  give  sufficient  detail  and  do  not  show  sufficient 
evidence  of  careful,  searching  investigation.  The  agen- 
cies understand  this  criticism  to  refer  mainly  to  their  fail- 
ure to  obtain  property  statements  in  so  many  of  the  cases 
investigated,  and  they  offer  in  defense  the  unwillingness 
on  the  part  of  merchants  to  comply  with  a  request  which 
they  consider  an  unjustified  effort  to  learn  details  of 
their  business  which  they  regard  as  confidential  and  do 
not  wish  to  make  public.  They  will  not  submit  to  this, 
and  usually  give  as  a  reason  that  they  can  get  all  the 
credit  they  want  without  making  a  statement  or  having 
a  rating. 

There  is  some  truth  in  this  defense.  Credit  men  will 
have  to  admit  that  they  are  in  part  responsible  for  this 
situation,  and  that  the  agencies  should  not  be  criti- 
cized too  strongly  on  this  point.  From  such  mer- 
chants statements  should  be  required  by  credit  men. 
It  is  probably  true  that  most  merchants  would  give  a 
statement  more  readily  to  a  house  from  which  they  are 
asking  credit,  if  properly  approached,  than  they  would 
to  an  agency  which  they  think  is  making  money  out  of 
the  proposition. 

In  1902  a  referendum  was  taken  by  the  Mercantile 
Agency  Service  Committee  of  the  National  Association 
of  Credit  Men,  which  indicated  that  37^  per  cent  of  the 
special  reports  furnished  by  the  agencies  contained  prop- 
erty statements.  This  percentage  has  probably  greatly 
increased  with  passing  years,  and  it  indicates  that  the 
commercial  agencies  are  gaining  ground  in  their  effort 
to  obtain  statements.  It  also  may  indicate  that  the  agen- 
cies are  still  obtaining  a  larger  percentage  of  statements 
than  is  being  furnished  to  houses  direct. 


REPORTS   OF   SALESMEN   AND   AGENCIES        55 

Revision  of  Special  Reports 

Perhaps  the  most  frequent  complaint  is  the  failure 
of  the  agencies  to  keep  special  reports  revised  and  up 
to  date.  They  claim  that  a  revision  every  six  months 
should  be  satisfactory  for  credit  requirements,  but  they 
frequently  come  short  of  maintaining  this  standard  of 
service.  If  a  firm  is  not  frequently  investigated  it  is  very 
easy  to  fall  behind  on  the  revision.  The  more  probable 
cause,  however,  is  that  with  the  increasing  list  of  names 
to  be  reported  on,  the  organization  of  the  agencies  cannot 
keep  up  with  their  work.  Hence  the  large  number  of 
reports  being  furnished  with  the  rubber  stamp  addition, 
"Will  get  later." 

Co-operation  with  Commercial  Agencies 

Credit  men  will  find  it  a  good  plan  to  keep  in  close 
touch  with  the  local  managers  of  the  agencies  either  by 
personal  interview  or  by  correspondence.  Such  intimate 
contact  will  have  a  tendency  to  improve  the  service.  The 
subscriber  learns  what  the  necessary  limitations  are,  and 
the  agency  manager  learns  what  shortcomings  should  be 
remedied.  The  agencies  will  welcome  this  sort  of  co- 
operation, and  they  will  be  glad  to  have  returned  to  them, 
with  explanations,  any  special  reports  which  are  not  up 
to  standard,  especially  those  that  are  out  of  date  or  carry 
any  inaccuracies.  Such  co-operation  helps  them  to  im- 
prove the  service  and  to  remedy  cases  of  oversight.  Some- 
times a  branch  manager  will  revise  a  report  by  rewriting 
it,  changing  the  language  but  giving  no  new  informa- 
tion. This  is  perhaps  rare,  but  it  has  happened;  and 
when  it  does,  the  agency  would  like  to  know  of  it. 

One  of  the  chief  sources  of  revenue  for  the  agencies 
is  selling  special  reports.  They  know  that  the  better  the 
reports,  the  larger  the  demand.  As  an  instance  of  co- 


56  MERCANTILE  CREDITS 

operation  with  the  agencies,  the  following  may  be  related : 
One  credit  man  had  a  judgment  against  a  merchant  in  a 
western  town  but  had  been  told  by  the  attorney  who  se- 
cured the  judgment  that  the  debtor  was  execution  proof. 
One  day  in  looking  through  the  rating  book  for  another 
name,  he  discovered  that  this  merchant  against  whom  he 
had  the  uncollectible  judgment  had  a  rating  of  $2,000  to 
$3,000  second  grade  of  credit.  This  was  about  three  years 
after  the  judgment  had  been  secured.  He  at  once 
requested  that  the  attorney  tell  him  why  the  judgment 
could  not  be  collected  on  such  a  rating.  The  attorney  came 
back  with  a  list  of  four  or  five  judgments  against  this 
merchant  on  all  of  which  an  execution  had  been  returned 
unsatisfied,  "No  property  found."  It  was  then  taken  up 
with  the  agency,  with  the  result  that  when  the  next  book 
was  issued  the  rating  had  disappeared.  The  agency 
regretted  the  mistake,  but  was  glad  to  know  about  it. 
Such  cases,  it  should  be  said,  are  rare. 

Improvement  of  Service 

As  the  commercial  agency  stands  today,  the  most 
valuable  information  furnished  is  no  doubt  the  rating 
books,  including  pocket  editions,  the  special  reports,  and 
travelers'  letters  of  introduction.  In  the  special  reports 
the  best  features  are  age  and  antecedents,  property  state- 
ments and  confirmation  of  them  when  given,  and  the 
trade  experience,  when  any  is  furnished. 

The  general  impression  is  that  under  the  fees  charged 
by  the  agencies  for  their  service,  the  quality  and  stand- 
ard of  the  service  could  be  greatly  improved  and  still  leave 
them  a  very  good  profit.  If  this  impression  is  wrong 
and  the  agencies  are  furnishing,  for  the  present  cost,  all 
that  in  reason  can  be  expected,  then  it  is  probably  true 
that  their  subscribers  would  cheerfully  pay  a  reasonable 


REPORTS   OF   SALESMEN   AND   AGENCIES        57 

increase  in  cost  for  a  service  that  would  remedy  the 
defects  mentioned  above  and  give  other  desirable  im- 
provements. Greater  efficiency  in  agency  service  would 
be  a  boon  to  commerce,  and  the  saving  by  such  service  of 
one  moderately  sized  loss  from  a  bad  debt  would  pay  the 
cost  of  a  greatly  improved  service. 


CHAPTER  VI 

OTHER  SOURCES  OF  CREDIT  INFORMATION 

Value  of  Attorneys'  Reports 

There  will  be  differences  of  opinion  concerning  the 
value  of  attorneys'  reports.  They  have  had  a  long  career 
of  usefulness,  however,  and  are  being  used  successfully 
by  a  great  number  of  houses.  The  criticism  of  this  class 
of  information  does  not  seem  to  be  any  more  serious  or 
important  than  that  recorded  against  other  media  in  use 
of  getting  credit  information. 

The  outstanding  fact  in  favor  of  these  reports  is  that 
they  are  up  to  date.  If  anything  had  occurred  recently 
affecting  the  financial  standing  of  the  merchant  inquired 
on,  an  attorney  would  be  very  apt  to  know  of  it. 

The  best  reports  of  this  kind  seem  to  be  those  made 
on  the  forms  furnished  by  the  publishers  of  attorneys* 
lists.  These  blanks  contain  the  fewest  number  of  ques- 
tions necessary  to  give  a  line  on  the  merchant's  present 
condition,  and  the  attorney  can  answer  them  quickly. 
This  tends  to  secure  his  co-operation  and  a  prompt  reply. 
Sometimes  he  ignores  the  questions  and  answers  briefly, 
"Good  for  the  amount  named."  When  the  reply  comes 
in  this  form  it  is  prima  facie  evidence  that  the  attorney 
is  sure  in  his  own  mind  that  the  risk  is  good.  Otherwise 
he  would  answer  the  detailed  questions  and  let  the  credit 
man  decide. 

Attorneys  seem  to  be  willing  to  carry  out  their  con- 
tracts to  furnish  such  reports,  and  the  credit  men  using 

58 


OTHER  SOURCES  OF  CREDIT  INFORMATION      59 

this  form  of  service  usually  continue  to  do  so  year  after 
year  without  complaint.  It  is  advertising  for  the  attorneys 
which  does  not  cost  them  much.  Every  year  they  secure 
a  certain  volume  of  draft  collections  from  houses  to  which 
they  have  been  making  reports,  and  when  such  drafts 
come  into  their  hands  they  receive  the  full  commission  in- 
stead of  giving  up  one-third  of  it  to  a  forwarding  at- 
torney. When  an  attorney  in  any  town  has  held  such 
a  reporting  contract  for  three  or  four  years  he  has  no 
doubt  accumulated  in  his  office  a  pretty  definite  record  of 
the  financial  standing  of  every  firm  in  his  town,  and  the 
labor  of  filling  out  the  reports  as  they  come  in  is  re- 
duced to  a  minimum.  Practically  all  publishers  of  these 
lists  give  bond  for  the  responsibility  of  the  attorneys  on 
their  list,  so  that  as  a  line  of  service  it  is  dependable  and 
secure. 

These  attorneys  also  in  a  short  time  become  informed 
as  to  the  scope  and  kind  of  information  a  credit  man  likes 
to  have  in  passing  a  credit  and  they  shape  their  reports 
accordingly. 

Tardy  Replies 

There  is  occasionally  complaint  that  attorneys  do  not 
answer  promptly.  That  is  a  serious  objection  when  it 
occurs,  but  it  is  comparatively  rare  and  does  not  seem 
to  be  such  a  drawback  to  this  form  of  service  as  to  lessen 
its  popularity  or  desirability.  It  may  happen  that  an  at- 
torney will  make  a  campaign  for  a  political  office,  which 
temporarily  causes  neglect  of  part  of  his  business;  or  he 
may  be  away  for  a  few  days  attending  court  in  another 
city.  He  usually  cleans  up  on  the  accumulated  reports 
as  soon  as  he  gets  back  to  his  office.  When  he  has  a 
partner  or  a  reliable  assistant  in  his  office  the  reports 
receive  prompt  attention  in  any  case. 


60  MERCANTILE  CREDITS 

Considering  the  fact  that  an  attorney,  especially  in  a 
small  town,  may  sometimes  be  a  very  busy  man,  this 
form  of  service  averages  well.  An  attorney  on  one  of  the 
lists  had  received  from  one  of  the  subscribers  an  account 
for  collection.  After  a  reasonable  time  the  credit  man 
wrote  for  a  report  on  the  status  of  the  claim.  Not  re- 
ceiving a  reply,  he  wrote  again,  with  more  emphasis.  The 
attorney  then  filed  the  following  demurrer : 

This  account  will  be  paid  by  November  ist.  There  is  nothing 
wrong  with  the  account.  A  private  law  practice,  and  being  attor- 
ney for  our  city,  also  secretary  of  a  Rubber  Corporation,  and 
attorney  for  other  corporations,  as  well  as  operating  a  general 
store,  besides  the  last  sickness  and  death  of  my  father  a  few  days 
ago,  has  caused  this  to  be  overlooked. 

In  view  of  the  number  of  "irons  in  the  fire"  the 
attorney  had,  the  credit  man  accepted  his  alibi  with 
contentment  and  rested  on  his  oars. 

Bank  Reports 

A  report  received  from  a  bank  is  a  valuable  source 
of  information.  It  is  also  always  up  to  date,  and  if  the 
merchant  inquired  on  is  a  customer  of  the  bank,  more 
real  and  reliable  information  may  come  from  this  source 
than  from  any  other. 

There  used  to  be  a  very  general  and  widespread  preju- 
dice against  bank  reports.  It  still  exists  in  some  quarters, 
but  as  a  rule  it  is  now  not  very  prevalant.  This  prejudice 
was  based  on  a  belief  that  the  merchant  being  inquired 
about  generally  owed  the  bank  from  which  the  inquiry 
was  made,  and  that  the  bank  would  make  a  roseate  re- 
port regardless  of  actual  conditions,  in  order  to  induce 
the  jobber  or  manufacturer  making  the  inquiry  to  fill 
the  order.  Out  of  the  proceeds  of  the  sale  of  such  mer- 
chandise the  bank  would  secure  payments  of  the  loan, 


OTHER  SOURCES  OF  CREDIT  INFORMATION      61 

leaving  its  customer,  the  merchant,  to  be  put  through 
bankruptcy  perhaps  by  the  creditor  who  had  extended 
the  credit  on  the  bank's  recommendation. 

Experience  probably  teaches  that  the  above  picture 
is  painted  somewhat  from  imagination.  Most  banks  today 
have  their  credit  man  or  credit  department.  Most  of  them 
buy  commercial  paper  and  conduct  a  very  searching  ex- 
amination as  to  credit  on  this  class  of  loans.  They  know 
and  appreciate  the  exchange  of  credit  information.  They 
take  a  businesslike  view  of  these  matters.  If  a  bank  were 
receiving  a  great  many  inquiries  concerning  the  credit 
standing  of  one  of  their  customers  to  whom  they  had 
given  a  line  of  credit,  or  if  they  were  receiving  sight 
drafts  for  collection  frequently  on  such  a  customer,  which 
were  returned  unpaid,  it  would,  as  a  rule,  put  the  bank 
on  notice  and  lead  it  to  revise  its  credit  file — possibly  to 
call  on  the  merchant  for  an  explanation. 

Discretion  in  Using  Bank  Service 

Banks  get  a  great  many  inquiries  on  merchants  who 
do  not  keep  an  account  with  them.  They  have  then  no 
immediately  available  information,  but  must  take  time  to 
answer  the  inquiry  and  say  so.  There  has  been  some 
criticism  of  banks  that  ask  25  cents  in  advance  for  a 
report.  Some  allowance  should  be  made  for  this  atti- 
tude on  the  part  of  the  small  town  bank,  as  it  is  about  the 
only  organization  furnishing  such  information  without 
any  expectation  of  getting  something  out  of  it  in  the  fu- 
ture. There  is  little  chance  for  reciprocity.  This  charge 
policy  was  possibly  adopted  because  of  the  great  number 
of  random  inquiries  the  banks  were  called  on  to  answer. 
To  most  houses  an  up-to-date  bank  report  costing  25 
cents  is  better  or  possibly  worth  more  than  an  agency 
report  which  may  be  six  months  or  a  year  old. 


62  MERCANTILE  CREDITS 

An  important  point  to  consider  in  making  a  bank  in- 
quiry is  that  it  shall  be  directed  to  the  bank  where  the 
merchant  keeps  his  account.  This  fact  can  be  learned 
in  two  ways:  (i)  from  the  salesman's  report;  and  (2) 
by  having  the  bookkeeper  note  the  name  of  the  bank  on 
the  ledger  when  the  first  remittance  comes  in.  Unless 
the  name  of  the  customer's  bank  is  secured  in  this  way, 
the  bank  inquiry  is  barred  in  towns  having  more  than  one 
or  two  banks,  and  especially  in  towns  like  Grand  Rapids, 
Des  Moines,  or  Kansas  City. 

Every  credit  man  should  be  systematic  about  this  and 
not  annoy  banks  with  inquiries  on  merchants  whose  stand- 
ing the  bank  has  no  occasion  to  know. 

How  One  Bank  Helped 

As  an  illustration  of  the  conscientious  way  in  which 
most  banks  will  give  credit  information,  the  following 
incident  is  worth  considering.  A  western  house  received 
a  first  order  from  a  merchant  in  a  cotton  state  during 
the  year  1917,  amounting  to  about  $600.  The  house  fol- 
lowed its  rule  of  making  up  a  credit  file  for  a  new  custo- 
mer. This  merchant  had  an  excellent  rating,  and  as  the 
reports  came  in  they  were  so  favorable  that  the  house  de- 
cided to  ship  the  order,  although  the  inquiry  sent  to  the 
local  bank  had  not  been  answered.  Just  before  the  ship- 
ment had  gone  to  the  depot  the  bank  report  came,  ad- 
vising in  positive  terms  against  extending  the  credit. 

This  was  so  unexpected  in  view  of  the  other  informa- 
tion that  the  credit  man,  who  held  up  the  shipment,  at 
once  wrote  the  bank,  explaining  the  circumstances  and 
asking  if  they  were  willing  to  say  why  their  report  was 
so  different  from  the  other  reports  obtained.  The  bank 
answered  promptly  and  frankly,  saying  that  the  mer- 


OTHER  SOURCES  OF  CREDIT  INFORMATION     63 

chant  in  question  had  always  deserved  his  good  rating 
and  that  they  had  previously  always  recommended  him 
for  credit  without  reserve.  Just  before  the  armistice  was 
signed,  however,  he  had  been  tempted  to  speculate  in 
cotton,  had  bought  it  when  it  was  near  the  peak  price, 
and  had  bought  so  heavily  that  the  peace  slump  had 
brought  him  to  the  verge  of  bankruptcy.  His  friends  had 
undertaken  to  carry  him  for  a  time,  but  they  knew  that 
unless  the  price  of  cotton  advanced  again  to  about  33 
cents  per  pound  it  would  probably  be  impossible  to  save 
his  business  from  liquidation.  Under  such  circumstances 
this  bank  felt  that  the  merchant  should  not  seek  credit 
outside  the  firms  already  interested,  which  understood  the 
situation. 

This  bank  was  one  of  the  creditors  and  might  have 
withheld  any  answer  to  the  inquiry.  The  course  it  pur- 
sued was  certainly  most  fair  and  broad-minded. 

Form  of  Inquiry 

Bankers  in  commenting  on  their  attitude  on  the  in- 
terchange of  credit  information  and  reports,  frequently 
urge  credit  men  not  to  use,  in  making  inquiries,  the  ordi- 
nary form  of  inquiry  blank,  but  to  write  a  letter,  under 
signature,  stating  the  size  of  credit  being  considered  and 
giving  the  facts  or  points  on  which  information  is  de- 
sired. They  will  respond  more  readily  and  freely  on  in- 
quiries coming  in  that  form,  as  they  frequently  have  con- 
fidential information  on  their  customer  which  they  do  not 
care  to  give  on  a  form  inquiry.  Bankers  also  take  into 
consideration  that  in  making  fair  and  legitimate  reports 
on  merchants  of  their  town  they  are  aiding  their  own  cus- 
tomers to  strengthen  their  credit  standing  and  are  thus 
promoting  the  business  success  of  their  community. 


64  MERCANTILE  CREDITS 

Interchange  of  Credit  Information 

Since  the  organization  of  the  National  Association  of 
Credit  Men  in  1896,  the  interchange  of  credit  information 
has  constantly  increased  in  value  and  importance,  and 
it  has  won  the  popular  approval  of  all  lines  of  trade. 
There  are  now  many  organizations  having  for  their  object 
the  encouragement  of  this  method  of  securing  ledger  in- 
formation on  credit  applicants.  They  all  represent  an 
effort  to  make  the  collection  of  such  figures  as  complete 
as  possible,  and  with  the  least  amount  of  detail  and  un- 
necessary labor  in  the  process.  The  credit  man  finds 
available  in  this  department  of  his  work  the  following 
means  of  getting  information: 

1.  The  exchange  bureaus  of  local  associations  of  credit 

men  and  the  central  bureau  of  the  National  Asso- 
ciation. 

2.  The  reporting  bureaus  and  boards  of  trade  in  various 

lines,  such  as  the  Hat  and  Cap  organization,  the 
Jewelers'  Board  of  Trade,  the  Lead  and  Oil  Asso- 
ciation, the  Lumbermen's  Trade  Association,  the 
Shoe  and  Leather  Bureau,  and  many  other  lines, 
who  serve  their  own  membership. 

3.  The  Credit  Clearing  House. 

4.  Inquiries  from  trade  references.    This  class  of  investi- 

gation has  for  its  object  two  important  points: 
(a)  to  ascertain  how  the  applicant  for  credit  meets 
his  payments — does  he  take  cash  discounts,  pay  at 
maturity,  or  is  he  letting  accounts  run  past  due? 
— and  (b)  to  learn  the  aggregate  of  his  indebtedness. 

It  will  be  apparent  that  considerable  vigilance  and 
careful  thought  must  be  given  to  this  part  of  the  credit 
file.  The  manner  of  payment  may  be  determined  with 
reasonable  accuracy,  but  it  is  not  always  certain  that  the 
total  indebtedness  has  been  ascertained.  This  is  because 
in  so  many  cases  not  all  the  houses  who  are  selling  the 


OTHER  SOURCES  OF  CREDIT  INFORMATION     65 

risk  have  been  included  in  the  clearing  or  have  been 
reached  by  the  inquiries.  If  he  has  given  a  signed  prop- 
erty statement,  however,  the  ledger  information  obtained 
as  above  may  assist  materially  in  verifying  the  accuracy  of 
the  statement  as  to  liabilities. 

Credit  Interchange  Bureaus 

The  credit  interchange  bureau  system  of  the  Na- 
tional Association  of  Credit  Men  is  being  developed  with 
a  view  to  securing  the  experience  of  all  markets  in  which 
the  credit  applicant  may  be  buying.  The  plan  contem- 
plates that  the  bureaus  of  the  various  local  associations 
shall  exchange  with  each  other.  There  are  about  100  local 
associations  now  maintaining  such  bureaus. 

To  make  this  interchange  national  in  its  scope  has 
required  much  time,  careful  thought,  and  an  immense 
amount  of  labor  on  the  part  of  the  interchange  bureau 
committees  of  the  national  organization.  Many  problems 
have  had  to  be  solved  in  giving  the  prompt  service  re- 
quired at  a  minimum  cost.  The  charge  for  such  service 
to  members  has  been  held  at  the  lowest  rate  that  would 
make  the  bureaus  self-supporting.  One  of  the  most 
difficult  problems  grew  out  of  the  fact  that  a  bureau  in 
a  large  city  might  receive  in  one  day  150  inquiries  from 
its  own  members  and  600  inquiries  from  the  bureaus  of 
other  cities.  As  promptness  is  an  essential  element  in 
this  service,  the  labor  involved  in  handling  such  a  volume 
can  be  readily  understood. 

Chicago  Bureau's  Method  of  Handling  Inquiries 

Two  forms  used  by  the  bureau  of  the  Chicago  associa- 
tion are  here  given.  Figure  i  shows  the  form  used  for 
clearing  the  information  collected  on  an  inquiry  from 
one  of  its  own  members.  The  replies  received  from  the 


66 


MERCANTILE  CREDITS 


various  houses  selling  the  applicant  are  tabulated  on  this 
sheet,  which  is  kept  on  file.    A  copy  is  mailed  to  the  mem- 


CRF01T  INTERCHANGE  BVKSAV 

NATIONAL  ASSOCIATION  OF  CREDIT  MEN. 

Chicago  Association  of  Credit  Men 

1ft*  Meaner  ««tM>R«»*rt  It  Mt«vu*MM&    <>•  coMrau  w.  t.ihmd  i»  (.xKMiith  from  m«a>k*r.  ud  Mat  ti>  TOO  k?  <&•;  Burm 

-^V—  ...v^.  ft  .-,  ^  -..^^    .    .           ..^^-.-.y^,-   rlM.rtrH.l>iirfil»,||.«  .,  ,.|lui-J 

SSSSft 

•OLD 

K«!£7 

AMOUNT 
OWIMO 

£?££ 

'aitom 

o7.\" 

«p-««. 

mi 

J£Y£. 

xtsz 

FIGURE  I. — Form  Used  by  Chicago  Credit  Interchange  Bureau 
in  Answering  a  Member's  Inquiry. 


TICXKT 

CREDIT  INTERCHANGE  BUREAU 
NATIONAL  ASSOCIATION  OF  CREDIT  MEN 

Chicago  Association  of  Credit  Men 


0*  txpcriaBeeaiMbwt:  REPORT  AMOUNTS  IN  DOLLARS  ONLY.  Pint  Order  $ 


.Drt>«fLutS«Je 


COMMENT:  PUce  X  in  front  of  an.w«r.  USE  CAUTION 


iMO'knoratobei 
NO.. 


FIGURE  2. — Form  on  Which  Members  of  Chicago  Credit  Ex- 
change Bureau   Make   Reports. 

her  making  the  inquiry.    Each  member  of  the  bureau  is 
given  a  number,  and  this  number,  appearing  in  the  first 


OTHER  SOURCES  OF  CREDIT  INFORMATION     67 

column  on  the  form,   is   the  only  identification   of   the 
houses  reporting  on  the  risk. 

Figure  2  shows  the  form  used  by  each  house  in  mak- 
ing its  report  on  the  applicant  being  investigated,  the  in- 
formation on  which  is  tabulated  on  the  first  form  (Fig- 
ure i).  On  inquiries  from  other  bureaus  this  second 
sheet  (Figure  2)  is  mailed  direct  to  that  bureau,  just 
as  received  from  the  reporting  house,  the  number  at  the 
lower  right-hand  corner  being  the  only  indication  as  to 
the  source  of  the  information.  The  bureau  receiving 
such  reports  makes  its  own  tabulation  for  its  inquiring 
member.  This  plan  is  simple,  practical,  and  effective, 
making  a  great  saving  of  expense  and  labor  in  furnishing 
the  desired  information  promptly.  The  National  Asso- 
ciation is  carefully  but  energetically  developing  this  Chi- 
cago system  to  cover  all  markets,  which  seems  likely  to 
become  more  effective  than  any  other  method  in  determin- 
ing the  extent  of  the  purchases  of  a  credit  applicant  and 
his  aggregate  indebtedness  in  all  markets. 

Trade  Bureaus 

Of  the  interchange  bureaus  for  the  various  trade  or- 
ganizations, that  of  the  Lumbermen's  Association  is  per- 
haps as  well  organized  and  managed  as  any  of  them,  in 
that  it  covers  the  various  markets  rather  thoroughly  and 
secures  very  general  co-operation.  In  this  line  the  ac- 
counts are  for  large  amounts  on  the  average,  and  credits, 
therefore,  must  be  scrutinized  with  care.  As  freights 
are  allowed  on  shipments  in  many  cases,  the  delivery  is 
at  destination  instead  of  at  point  of  shipment,  which  may 
be  considered  as  an  advantage  to  the  seller. 

Two  forms  are  here  given  which  will  indicate  the 
method  of  clearing  the  information  and  the  rather  search- 
ing investigation  contemplated  in  the  reference  on  trade 


68 


MERCANTILE  CREDITS 


inquiry  reports.  One  form  (Figure  3),  called  the 
"tracer,"  gives  the  daily  list  of  firms  on  which  information 
is  sought.  Each  firm  is  given  a  number  on  the  list  and 
the  members  reporting  on  the  names  they  are  selling  use 
this  number  in  giving  ledger  experience  in  connection  with 


TRACER 


Caicajfo.  IIL.  Apnl  25.  1902 


If  yon  are  (effing  toy  of  Qto  parties  named  in  the  following  list,  pteaec  report  (an  this  sheet)  what  yonr 
experience  has  been  fa  each  case,  Whether  prompt,  medium,  or  stow  pay,  dispute  or  claim  deduction;  good. 
firir,  or  poor  risk,  and  the  average  amount  of  credit  yon  extend,  and  amount  now  owing  to  date.  Do  they 
give  paper?  Pay  aame  promptly,  or  ask  renewals?  Your  name  will  NOT  be  nsod  in  connection  with  the 
Information  yon  gtve  na. 

THE  PACT  Of  A  NAME  APPEARING  ON  THE  LIST  IS  NOT  TO  BE  UNDERSTOOD 
AS  REFLECTINe  ON  THEIR  CREDIT  Oft  FINANCIAL  STANDING.  ' 

LUMBERMEN'S  CREDIT  ASSOOATIOW 


BE  PARTICULAR  TO.  GIVE  DATES  OF  TRANSACTIONS 


REPLY  PROMPTLY  end  yoo  will  receive  a  copy  of  report  gratis. 
SIGN  YOUR  NAME  AND  ADDRESS,  OTHERWISE  WE  DO  NOT  KNOW  FROM 
WHOM  THE  INFORMATION  IS  RECEIVED. 


FIGURE  3. — Form  on  Which  Members  of  Lumbermen's  Credit 
Association   Report    Inquiries   to   Bureau. 

the  tabulated  information  in  the  column  form  at  bottom 
of  the  sheet. 

The  other  form  (Figure  4)  is  the  inquiry  on  trade 
reference  form  used  in  securing  the  trade  reports  or 
experience  from  members  on  firms  which  they  are  known 
to  be  selling.  An  examination  of  the  questions  included 
in  this  form  will  show  the  thoroughness  of  the  investiga- 
tion which  the  bureau  undertakes  to  make  for  its  mem- 
bers. When  a  creditor  has  such  a  report  from  all  the 


OTHER  SOURCES  OF  CREDIT  INFORMATION      69 


LUMBERMENS'  CREDIT  ASSOCIATION 

SPECIAL  CREDIT  AGENCY  FOR  LUMBERMEN 

Established  1ST* 
Publisher*  of 

Clancy's  RED  BOOK  Service 

60S  South  Dearborn  Street 


Please  furnish  us.  in  confidence,  with  what  information  you  may  possess,  ana  year 


with  the  desired  inf 


Hew  long  have  you  told  him  or  them?   - 

Boy  on  open  account  or  close  account  by  note)  -      - 

Do  yon  require  party  to  discount) When  was  your  last  shipment).. 

Term  on  open  account) ,    .        ,     ,  Terras)  by  note? 


Make  practice  of  making  unjust  claims  based  on  quality  or  amount  invoiced  and  demand 

deduction,  which 

Satisfactory  in  settlements)  ,. ,,      ,  ,.  

Do  yon  limit  line  of  credit  or  sell  him  or  them  all  they  wish  to  k-y* 

Highest  amount  of  credit  you  have  extended > ., 

How  much  owing  yon  now? Amount  past  due?    ,,, » 

Discount  all  purchases? Pay  promptly  as  per  above  terms > 

Medium  pay.  state  how  long  over  regular  terms? , _______ __»__«_«. 

Slow  or  very  slow  pay.  which? ...,,-. 

Ask -extension  on  account? .    , 


Ask  extension  on  note  or  acceptance? 

Do  you  have  to  draw  draft  to  secure  payment? 

Refuse  to  give  note  and  take  overtime  on 

Have  you  been  compelled  to  place  account  for  collection  or  send  your  representative  to 

collect,   which? , 

Countermand  orders  without  just  cause) 

What  kind  of  goods  do  you  .ell  him  or  them? 

If  yon  know,  kindly  state  lines  of  business  engaged  in) ; 

What  conclusion  have  you  arrived  at  from  your  experience  and  fact*  gathered  as  to  credit 

good,  fair  or  doubtful,  which? 

P1XA&E  &N8WEII  FOXY  BACH  QUESTION  THAT  YTB  MAI  VOBM  A 


FIGURE  4. — Form  on  Which  Members  of  Lumbermen's  Credit 
Association  Report  Trade  Experience  to  Bureau. 


70  MERCANTILE  CREDITS 

houses  selling  the  prospective  credit  risk,  it  becomes  pos- 
sible to  make  an  intelligent  decision  on  the  applicant. 

Other  trade  bureaus  may  cover  the  ground  quite  as 
thoroughly  in  their  information  blanks,  but  it  is  appar- 
ent that  such  interchange  of  information  is  very  valuable. 

Proper  Use  of  Interchange  Information 

The  credit  man  should  treat  this  interchange  informa- 
tion conservatively.  If  he  places  too  much  reliance  on 
the  experience  of  other  houses  he  may  unconsciously  be 
allowing  other  credit  men  to  pass  on  his  credits  in  a  de- 
gree; and  these  other  houses  may  be  following  a  more 
liberal  credit  policy  than  his  house  should  adopt.  The 
interchange  information  should  be  weighed  in  connection 
with  all  other  conditions  disclosed  by  the  credit  file. 

Again,  the  reports  from  exchange  bureaus  and  the 
Credit  Clearing  House  should  not  be  depended  on  as  cover- 
ing the  entire  market.  In  some  lines,  especially  general 
stores  and  department  stores,  they  may  cover  only  a  small 
part  of  the  applicant's  purchases.  Further,  this  class 
of  reports  should  not  in  any  way  take  precedence  over 
or  take  the  place  of  direct  inquiries  addressed  to  the 
references  given,  or  to  the  houses  shown  to  be  selling 
him  by  the  salesman's  report.  These  direct  reports  may 
represent  the  most  valuable  and  important  part  of  the 
trade  information. 

In  1918  a  failure  occurred  in  an  eastern  market  of  a 
firm  in  the  clothing  or  textile  line,  which  showed  assets 
of  about  $2,600,000  and  liabilities  of  $2,300,000,  accord- 
ing to  reports  published  in  trade  papers  at  that  time.  No 
credit  man  for  an  interested  house,  after  this  failure  had 
occurred,  would  have  been  likely  to  defend  the  credit 
given  by  his  house  as  justifiable  under  the  ratio  disclosed 
of  assets  to  liabilities.  It  would  have  been  interesting 


OTHER  SOURCES  OF  CREDIT  INFORMATION      71 

to  know,  however,  to  what  extent  each  credit  man  was  in- 
fluenced in  his  decision  by  the  fact  that  other  houses  were 
extending  large  lines  to  this  firm.  No  one  house  seems 
to  have  realized  the  great  aggregate  of  existing  indebted- 
ness. Surely  credit  would  have  been  refused  had  the 
actual  condition  been  known  as  it  should  have  been. 

Such  experiences  throw  a  strong  side  light  on  the  im- 
portance of  carefully  studying  the  facts  disclosed  by  the 
trade  interchange  investigation.  In  the  case  of  clearings 
through  exchange  bureaus  and  the  Credit  Clearing  House 
the  question  should  always  be  asked :  To  what  extent 
do  these  organizations,  through  their  members,  cover 
the  entire  market  in  which  the  applicant  is  buying  ? 

Value  of  Personal  Interview 

The  personal  interview  with  the  credit  applicant  should 
always  be  had  when  possible.  It  is  always  helpful  to  the 
credit  man  to  have  the  benefit  of  this  personal  contact 
and  acquaintance  as  a  basis  for  future  correspondence. 
It  adds  to  his  experience  and  training  in  reading  human 
nature,  and  he  can  learn  many  facts  in  a  short  conversa- 
tion which  might  not  be  readily  ascertained  otherwise.  In 
many  houses  when  an  out-of-town  customer  calls  and  is 
introduced  to  the  credit  man,  he  is  asked  to  meet  "our 
Mr.  Jones/'  The  credit  man's  title  is  not  mentioned  and 
the  customer  does  not  discover  that  he  has  met  the  credit 
man,  unless  something  in  the  condition  of  the  account 
needs  discussion.  Even  then  the  customer  may  think 
he  is  talking  to  the  auditor  or  treasurer  of  the  firm.  The 
friction  or  embarrassment  often  engendered  by  the 
thought  that  the  applicant's  credit  is  in  question  is  avoided, 
and  the  credit  man  gets  incidentally  and  freely  all  the 
information  he  may  require. 

In  the  case  of  large  accounts  which  may  present  diffi- 


72  MERCANTILE  CREDITS 

cult  decisions,  it  will  often  be  well  worth  while  to  have 
a  representative  of  the  credit  department  spend  a  day 
with  the  customer  if  the  distance  is  not  too  great.  Such 
a  visit  may  lead  the  credit  department  to  decide  to  close 
the  account  at  once  to  avoid  a  loss,  or  it  may  lead  to  a 
closer,  friendlier  connection  and  increased  volume  of  busi- 
ness. Many  houses  are  adopting  this  policy  with  all  large 
accounts  which  involve  any  element  of  doubt  and  cannot 
be  settled  by  the  usual  credit  information ;  and  such  houses 
consider  the  policy  a  good  investment. 

Other  Sources  of  Information 

Many  houses  who  have  accounts  with  large  corpora- 
tions find  that  they  can  use  to  advantage  as  credit  infor- 
mation one  of  the  manuals  now  published  annually  giving 
data  and  statistics  on  such  corporations. 

Another  source  of  information,  which  should  be  in 
every  credit  office,  is  the  "Credit  Man's  Diary,"  pub- 
lished annually  by  the  National  Association  of  Credit 
Men.  Questions  will  arise  frequently  in  analyzing  credit 
files  which  can  be  quickly  answered  by  this  publication. 


CHAPTER  VII 

THE  PROPERTY  STATEMENT 

Obtaining  Signed  Financial  Statements 

There  are  two  propositions  to  be  considered  in  con- 
nection with  the  property  statement:  (i)  how  to  obtain 
the  statement;  (2)  how  to  use  it,  and  get  all  the  aid 
which  it  can  furnish  in  judging  the  credit. 

A  signed  property  statement  may  properly  be  called 
the  key  to  the  analysis  of  the  credit  file.  It  furnishes  a 
base  line,  or  starting  point,  in  the  investigation,  because  it 
will  give  many  facts  which  will  usually  not  be  obtained 
in  any  other  way.  It  is  the  standard  by  which  many 
other  items  of  information  can  be  measured. 

It  is  therefore  important  that  the  credit  man  make  an 
effort  to  obtain  it  in  all  cases  of  close  decisions  if  it  is 
not  included  in  the  special  report  of  an  agency. 

The  credit  man  should  develop  tact  and  skill  in  re- 
questing statements,  and  should  have  the  proper  mental 
attitude  in  approaching  the  proposition  in  each  case.  He 
should  have  the  courage  of  his  convictions  on  the  subject, 
yet  proceed  in  a  courteous  and  diplomatic  manner, 
whether  by  correspondence  or  personal  interview.  What 
he  is  asking  for  may  prove  to  be  as  much  a  favor  to  the 
applicant  for  credit  as  to  the  house  from  which  he  is  seek- 
ing credit. 

Explaining  Request  for  Statement 

The  request  for  a  statement  may  be  based  on  some 
or  all  of  the  following  reasons : 

73 


74  MERCANTILE  CREDITS 

1.  The  house  would  prefer  to  have  the  information 
concerning  the  resources  of  the  applicant  from  himself 
direct,  as  it  will  be  more  reliable  and  correct  than  if  ob- 
tained from  other  sources  which  may  not  be  properly  in- 
formed on  the  subject,  or  may  be  prejudiced  or  indiffer- 
ent. 

2.  It  is  customary  as  well  as  beneficial  to  make  such 
statements,  as  it  strengthens  the  credit  of  the  merchant 
who  makes  it.     In  furnishing  credit  to  a  merchant  the 
house  from  which  he  is  buying  is  giving  him  that  which 
supplements  his  capital  and  in  a  sense  is  entering  into 
partnership  with  him  to  the  extent  of  sharing  in  the  risk 
of  his  business. 

3.  The  giving  of  statements  inspires  confidence  and 
may  strengthen  his  position  if  he  should  wish  to  increase 
the  line  of  credit  during  the  season.     It  may  also  form 
the  basis  for  prompter  shipments  should  the  merchant  de- 
sire to  order  more  heavily  on  second  orders  during  the 
rush  season. 

4.  If  the  season  has  proved  unfavorable  or  other  con- 
ditions have  developed,  making  it  desirable  for  the  mer- 
chant to  have  a  short  extension,  his  request  might  be  con- 
sidered much  more  favorably  if  his  position  were  fortified 
by  having  given  a  property  statement.    This  reason  should 
be  given  only  in  cases  where  discretion  may  make  it  ad- 
visable. 

5.  The  credit  man  may  say  that  his  own  house  volun- 
tarily furnishes  an  annual  statement  of  its  own  financial 
condition  to  all  firms  from  which  it  asks  credit,  not  only  to 
strengthen  its  own  credit  but  because  it  feels  that  such 
firms  are  reasonably  entitled  to  this  information.     He  is 
therefore  asking  no  more  of  the  applicant  than  his  own 
house  is  willing  to  do  for  those  who  are  interested  in  its 
finances. 


THE  PROPERTY  STATEMENT  75 

Skill  in  Correspondence 

The  credit  man  in  correspondence  should  avoid  most 
diplomatically  any  semblance  of  timidity  in  making  re- 
quest for  a  statement.  He  should  show  a  convincing  be- 
lief in  the  reasonableness  of  his  proposition.  If  he  can 
skilfully  inject  into  his  letter  the  idea  that  he  fully  ex- 
pects a  cheerful  compliance  with  his  request,  there  is  a 
force  in  his  argument  and  a  psychological  effect  to  which 
many  merchants  will  unconsciously  yield.  It  is  a  part  of 
constructive  credit-granting  to  contribute  constantly  to  the 
educational  campaign  which  will  bring  about  a  universal 
compliance  with  the  business  custom  of  making  an  an- 
nual financial  statement. 

Where  Persistence  Won 

The  following  correspondence  will  illustrate  what  may 
be  accomplished  by  skilful  yet  persistent  urging  with  a 
recalcitrant  customer. 

A  Chicago  house  during  the  readjustment  period  fol- 
lowing the  World  War,  desiring  to  exercise  proper  len- 
iency with  all  deserving  debtors,  in  many  cases  found 
it  necessary  to  revise  credit  files.  One  such  customer  had 
been  running  behind  on  his  payments,  and  had  always  de- 
clined to  give  a  statement  to  the  mercantile  agencies.  He 
had  been  previously  approached  on  the  subject  both  by  the 
salesman  and  the  credit  department,  but  he  was  positive  in 
his  refusal.  The  credit  manager  wrote  him  as  follows : 

Permit  us  to  direct  your  attention  to  our  August,  September, 
and  October  bills,  which  are  now  due  and  payable,  and  a  check 
to  cover  by  return  mail  will  be  appreciated. 

We  also  note  upon  reviewing  our  credit  files,  that  we  have 
not  been  favored  with  a  late  financial  statement  from  you  and 
we  therefore  are  enclosing  a  blank,  which  we  would  be  pleased  to 
have  you  fill  out  in  detail  and  return  to  us  at  your  earliest 
convenience. 


76  MERCANTILE  CREDITS 

This  letter  brought  rather  a  prompt  reply,  but  the  re- 
sponse was  addressed  to  the  salesman  who  traveled  the 
territory  instead  of  to  the  house.  This  will,  perhaps, 
not  seem  unusual  to  most  credit  men  who  have  had  similar 
correspondence. 

Enclosed  we  hand  you  a  letter  just  received  from  your  collector 
which  explains  itself.  Of  course  we  do  not  have  to  discuss  with 
you  the  unusual  circumstances  which  have  existed  for  the  past  two 
years  and  which  have  resulted  in  the  unusual  condition  that  exists 
today.  It  would  be  sufficient  to  remind  you  that  orders  with 
all  houses  were  from  three  to  fifteen  months  behind,  orders  being 
filled  piece-meal,  when  they  were  filled.  We  would  naturally 
accumulate  a  volume  of  unfilled  orders  with  you,  the  amount  of 
which  in  dollars  and  cents  could  be  hardly  estimated.  Without 
warning,  everybody  began  shipping.  Frankly,  we  have  taken 
liberties  with  your  account,  presuming  on  our  forty  years  of  busi- 
ness relations,  and  tried  to  keep  up  with  the  accounts  of  com- 
parative strangers,  with  whom  we  have  dealt  for  only  ten  or 
fifteen  years.  It  does  not  appeal  to  us  to  be  paying  interest  on 
this  investment,  which  just  to  the  extent  that  it  overstocks  us, 
is  a  dead  investment,  because  we  do  not  feel  that  we  are  in  the 
least  bit  at  fault  that  this  large  account  has  accumulated. 

Now  we  do  not  want  any  explanation  or  apology,  because  we 
believe  we  understand  just  exactly  what  the  situation  is,  that  your 
collector  is  expected  to  follow  some  system  in  his  collections.  We 
do  think,  however,  that  since  justice  should  be  tempered  with 
mercy,  rounding  up  delinquent  debtors  should  be  tempered  with 
common  sense.  We  do  not  expect,  however,  to  furnish  you  with 
any  statement.  You  have  been  getting  along  without  any  from 
us  for  thirty-five  or  forty  years  and  you  will  have  to  worry  along 
without  it  now.  UNDER  No  CIRCUMSTANCES  will  we  furnish  a 
financial  statement  to  anyone* 

The  salesman  in  this  case,  following  the  sensible  course 
of  co-operation,  promptly  turned  this  letter  over  to  the 
house;  and  the  credit  department,  nothing  daunted,  made 
the  following  reply,  which  resulted  in  changing  the  cus- 
tomer's attitude  and  secured  the  information  desired. 


THE  PROPERTY  STATEMENT  77 

Copy  of  your  letter  of  January  19,  addressed  to  our  Mr 

has  reached  the  writer. 

We  are  very  sorry  indeed  to  learn  that  you  interpreted  our 
request  for  a  financial  statement  as  a  reflection  on  your  credit 
standing,  for,  we  can  assure  you,  such  is  not  the  case. 

We  revised  our  credit  files  the  first  of  the  year  and  asked  every 
customer,  who  had  not  voluntarily  furnished  us  with  a  statement, 
to  execute  the  form  which  we  sent  you,  and  yours  is  the  first 
exception  we  have  received  so  far.  The  request  was  general  and 
we  made  no  exceptions,  irrespective  of  whether  customers  dis- 
counted their  bills  or  not,  hence  our  letter  to  you. 

The  fact  that  we  extend  you  unlimited  credit,  give  your  orders 
preference  and  use  our  earnest  endeavors  to  please  you,  we  believe 
is  conclusive  evidence  that  we  highly  appreciate  your  business  and 
desire  to  keep  you  on  our  books  as  a  thoroughly  satisfied  cus- 
tomer; and  if  it  is  your  ultimatum  not  to  furnish  us  with  a 
statement,  we  will  abide  by  your  decision. 

We,  ourselves,  voluntarily  furnish  our  creditors  with  an  annual 
financial  statement,  inasmuch  as  we  feel  that  a  concern  who  grants 
us  credit  is  virtually  a  partner  in  our  business,  as  they  furnish  us 
the  merchandise  on  credit  terms,  which  enables  us  to  successfully 
carry  on  our  business,  and,  as  partners,  they  are  entitled  at  all 
times  to  be  thoroughly  familiar  with  the  financial  status  of  our 
concern. 

In  reference  to  the  balance  due  us  on  your  account,  please  do 
not  worry  on  this  score,  for,  we  can  assure  you,  your  indebtedness 
to  us  does  not  cause  us  any  uneasiness.  We  have  implicit  confis 
dence  in  you,  as  you  have  always  treated  us  fairly  in  the  past, 
and  we  know  that  you  will  continue  to  do  so  in  the  future,  and  if 
you  require  a  little  extra  time,  you  are  heartily  welcome  to  it. 

We  trust  that  our  heretofore  pleasant  relations  will  not  be 
marred  by  this  divergence  of  opinion,  but  that  you  will  continue 
to  favor  us  with  your  valued  orders,  which,  we  can  assure  you, 
will  have  our  preferred  attention. 

Always  willing  to  serve  you, 
The  customer  then  made  the  following  reply: 

In  view  of  the  statements  contained  in  your  favor  of  the  igth, 
we  have  decided  that  it  would  be  only  fair  to  recede  from  our 
former  position  and  furnish  you  with  a  financial  statement,  which 
we  are  enclosing  herewith. 


78  MERCANTILE  CREDITS 

It  did  seem  to  us  that  your  former  letter  failed  to  give  due 
consideration  to  the  fact  that  we  had  just  made  you  a  good-sized 
remittance,  as  well  as  other  facts  that  need  not  be  recounted,  but 
we  will  be  very  glad  to  consider  the  matter  a  closed  incident  and 
can  assure  you  that  our  heretofore  pleasant  relations  will  not  be 
marred  by  this  discussion. 

The  Courage  of  Conviction 

This  correspondence  fairly  illustrates  what  is  meant 
by  diplomacy  in  correspondence,  coupled  with  a  firm  be- 
lief on  the  part  of  the  creditor  firm  in  the  justice  and  rea- 
sonableness of  their  position.  They  sought  to  make  it 
clear  that  their  request  was  made  as  a  matter  of  business 
fairness  and  right.  The  correspondence  also  shows  a 
good  working  basis  of  co-operation  between  salesman  and 
credit  manager.  A  comparison  of  the  two  letters  from 
the  customer  indicates  that  he  was  "soundly  converted." 
When  the  statement  was  received  it  showed  that  the  mer- 
chant was  not  financially  embarrassed,  except  because  of 
having  been  caught  with  too  large  a  stock  of  merchandise 
when  prices  began  to  drop.  He  paid  up  his  past  due  in- 
debtedness within  two  months  after  the  statement  was 
given.  His  reason  for  refusing  the  statement  in  the  first 
place,  therefore,  was  mainly  temperamental,  and  this  is 
perhaps  true  in  many  other  similar  cases. 

It  may  throw  an  interesting  side  light  on  this  incident 
to  state  that  the  "credit  man"  in  this  case  was  a  woman. 

Too  much  emphasis  cannot  be  placed  on  the  impor- 
tance of  obtaining  signed  property  statements  in  all  cases 
where  the  need  of  such  information  exists.  When  a  cus- 
tomer can  be  persuaded  to  give  one  it  establishes  a  feel- 
ing of  confidence  and  a  more  confidential  relation  on  both 
sides.  A  merchant  may  give  a  financial  statement  to  an 
agency  somewhat  hurriedly,  and  in  many  cases  when  he 


THE  PROPERTY  STATEMENT  79 

does  not  sign  it  his  figures  may  be  estimated ;  but  when  he 
fills  out  a  form  furnished  by  the  house  from  which  he  is 
seeking  credit,  he  is  more  likely  to  exercise  care  in  get- 
ting it  correct.  In  making  a  statement  in  this  way  he  may 
also  have  the  actual  condition  of  his  affairs  brought  to  his 
own  attention  more  clearly  than  in  any  other  way. 

Skill  Necessary  in  Using  Property  Statements 

A  successful  credit  man  of  experience,  in  talking  to 
a  class  in  Credits,  once  said :  "I  would  not  give  much  for 
financial  statements."  Another  credit  man,  equally  suc- 
cessful and  experienced,  when  this  subject  was  under  dis- 
cussion, remarked:  "Beware  of  financial  statements/' 

Neither  of  these  men  was  objecting  to  the  policy  of 
obtaining  such  statements.  Each  one  meant  that  unless 
the  statement  is  properly  dealt  with,  it  may  be  mislead- 
ing and  a  source  of  danger.  Each  one  meant  that  a  state- 
ment should  be  carefully  examined  and  an  effort  made  to 
confirm  or  corroborate  it. 

In  seeking  to  confirm  the  accuracy  of  a  financial  state- 
ment more  will  be  learned  about  the  actual  condition  of 
the  maker  than  could  be  learned  from  any  other  source. 
If  it  cannot  be  found  that  the  firm  making  the  statement 
has  the  amount  of  assets  claimed,  or  that  the  values  given 
are  not  confirmed,  or  if  the  liabilities  are  evidently  under- 
stated, then  the  statement  loses  force  and  cannot  be  re- 
lied on.  Such  a  disclosure  becomes  valuable  information, 
and,  what  is  more  important,  the  situation  is  discovered 
at  the  right  time  and  the  credit  under  consideration  can 
be  treated  accordingly. 

When  a  property  statement  has  been  received  by  mail 
or  through  a  salesman  it  should  be  acknowledged,  and  if 
there  is  any  opportunity  for  making  a  friendly  sugges- 


80  MERCANTILE  CREDITS 

tion  or  comment  upon  any  items  contained  in  it,  show- 
ing an  interest  in  the  firm  giving  it,  more  pleasant  rela- 
tions may  be  established. 

Statements  Obtained  by  Mercantile  Agencies 

It  is  claimed,  and  it  is  probably  true,  that  at  the  pres- 
ent time  a  larger  number  of  statements  is  being  obtained 
by  the  mercantile  agencies  than  is  being  given  to  houses 
direct.  One  reason  for  this  may  be  the  fact  that  during 
the  course  of  years  court  decisions  have  made  the  giving 
of  a  statement  to  mercantile  agencies  carry  the  same  bind- 
ing effect  on  the  maker  as  though  given  direct  to  the 
houses  using  the  agencies'  reports,  for  the  latter  are 
merely  acting  as  the  agents  of  the  houses  for  which  they 
are  obtaining  this  information.  This  consideration,  how- 
ever, should  not  lessen  the  activities  of  credit  men  in  en- 
deavoring to  obtain  a  signed  statement  in  all  cases  where 
the  mercantile  agencies  have  failed  to  secure  them. 

Indirect  Benefits 

It  is  generally  conceded  that  when  a  merchant  has 
given  a  signed  financial  statement  and  later  sees  financial 
trouble  ahead,  he  will  be  more  likely  to  pay  up  the  creditor 
to  whom  he  has  given  such  a  statement,  especially  if  there 
is  a  lingering  doubt  in  his  mind  as  to  whether  he  could 
readily  show  the  accuracy  of  the  figures  contained  in  that 
statement. 

Another  indication  that  the  importance  of  the  custom 
of  furnishing  property  statements  is  being  more  generally 
recognized  may  be  gathered  from  the  fact  that  one  asso- 
ciation of  retail  merchants,  in  a  convention  recently  held, 
passed  a  resolution  urging  the  members  to  make  annual 
financial  statements  to  their  creditors  as  a  means  of 
strengthening  their  credit  standing. 


THE  PROPERTY  STATEMENT  81 

In  securing  signed  property  statements  the  credit  de- 
partment in  many  cases  is  no  doubt  aiding  the  sales  de- 
partment, for  when  a  merchant  has  given  a  statement  to 
a  creditor  house,  and  it  has  been  accepted  as  satisfactory, 
he  naturally  feels  that  his  credit  standing  with  that  firm 
is  good,  and  he  will  be  likely  to  place  as  many  orders  as 
possible  with  that  house. 

Illinois  False  Statement  Act 

For  many  years  the  National  Association  of  Credit 
Men  has  been  conducting  a  legislative  campaign  for  se- 
curing the  enactment  in  all  the  states  of  a  uniform  law  to 
punish  the  making  of  false  financial  statements  in  order 
to  secure  credit.  In  the  state  of  Illinois  such  a  law  was 
passed.  This  law  is  as  follows : 

FALSE  STATEMENT  ACT  OF  ILLINOIS 
In  Effect  July,  1917 

That  any  person  who  shall  knowingly  make  and  sign  or  who- 
ever shall  either  directly  or  indirectly,  or  through  any  agency 
whatsoever,  cause  to  be  made  any  false  statement  in  writing  the 
contents  and  falsity  of  which  shall  be  known  to  him  with  intent 
that  it  shall  be  relied  upon,  respecting  the  financial  condition,  or 
means  or  ability  to  pay,  of  himself,  or  any  other  person,  firm  or 
corporation,  in  whom  he  is  interested,  or  for  whom  he  is  acting, 
for  the  purpose  of  procuring  in  any  form  whatsoever,  either  the 
delivery  of  personal  property,  the  payment  of  cash,  the  making  of 
loan  or  credit,  the  extension  of  a  credit,  the  discount  of  an  account 
receivable,  or  the  making  acceptance,  discount,  sale  or  indorse- 
ment of  a  bill  of  exchange  or  promissory  note,  for  the  benefit  of 
either  himself  or  of  such  person,  firm  or  corporation;  or 

Who,  knowing  that  a  statement  in  writing  has  been  made, 
respecting  the  financial  condition,  or  means,  or  ability  to  pay,  of 
himself,  or  a  person,  firm  or  corporation  in  which  he  is  interested, 
or  for  whom  he  is  acting,  procures  upon  the  faith  thereof,  for  the 
benefit  of  himself,  or  of  such  person,  firm  or  corporation,  either 
or  any  of  the  things  of  benefit  mentioned  in  this  section  at  a  time 


82  MERCANTILE  CREDITS 

when  he  knows  tne  contents  of  said  statement  and  knows  that  it 
is  false;  or 

Who,  knowing  that  a  statement  in  writing  has  been  made, 
respecting  the  financial  condition,  or  means  or  ability  to  pay  of 
himself  or  such  person,  firm  or  corporation,  in  which  he  is  inter- 
ested, or  for  whom  he  is  acting,  represents  on  a  later  day,  in 
writing,  that  such  statement  theretofore  made,  if  then  again  made 
on  said  day,  would  then  be  true,  when  in  fact  he  knows  that  said 
statement,  if  then  made,  would  be  false,  and  procures  upon  the 
faith  thereof,  for  the  benefit  either  of  himself,  or  of  such  person, 
firm  or  corporation,  either  or  any  of  the  things  of  benefit  men- 
tioned in  this  section,  shall  be  guilty  of  misdemeanor  and  punish- 
able by  imprisonment  for  not  more  than  one  year  or  by  a  fine  of 
not  more  than  one  thousand  dollars,  or  both  fine  and  imprisonment. 

Prior  to  the  enactment  of  this  statute  the  law  of  the 
state  (passed  in  1874)  was  ineffective.  The  courts  had 
so  construed  it  that  a  conviction  for  its  violation  was 
practically  impossible.  The  burden  of  proof  was  entirely 
upon  the  creditor,  and  under  the  laws  of  evidence  a  prose- 
cution always  failed.  The  new  law  puts  the  burden  of 
proof  upon  the  maker  of  the  statement.  The  creditor  has 
only  to  show  that  the  statement  was  made  for  the  pur- 
pose of  securing  credit,  that  relying  upon  it  the  credit  was 
extended,  and  that  the  statement  is  false.  A  properly 
worded  statement  blank,  such  as  is  now  very  generally  in 
use,  showing  that  the  statement  is  given  for  the  purpose 
of  obtaining  credit,  and  that  as  written  and  printed  it  is 
true  and  correct,  greatly  simplifies  the  furnishing  of  proof 
or  evidence  required  in  a  court  proceeding.  Many  other 
states  have  enacted  similar  statutes  and  they  act  as  a 
strong  deterrent  force  against  those  who  might  be  tempted 
to  make  false  statements. 

Credit  men  will  fail  to  get  the  direct  benefit  of  such 
legislation,  however,  unless  they  steadily  follow  the  policy 
of  seeking  for  signed  statements.  These  laws  are  effect- 
ive only  where  a  statement  has  been  given. 


THE  PROPERTY  STATEMENT  83 

A  Precautionary  Measure 

When  a  financial  statement  is  received  by  mail  the 
envelope  in  which  it  comes  should  be  marked  with  the 
initials  of  the  employee  who  opened  the  letter  and  the 
day  and  hour  of  arrival  should  be  noted  thereon.  Should 
the  statement  afterwards  prove  to  be  false,  this  precaution 
will  prove  of  great  value  in  offering  competent  testimony 
that  the  mail  was  used  to  defraud.  Without  such  memo- 
randum, the  attorneys  for  the  debtor,  by  technical  objec- 
tions under  the  rules  of  evidence,  may  succeed  in  having 
the  statement  excluded. 

A  form  of  property  statement  blank  now  used  by 
many  houses  combines  a  mailing  envelope  with  the  state- 
ment form.  This  insures  that  the  evidence  of  receipt  by 
mail  shall  always  be  in  the  credit  file  and  avoids  the 
chance  that  a  separate  envelope  might  be  lost  or  destroyed 
by  oversight. 

Necessity    of    Investigating    a    Refusal    to    Make 

Statement 

When  a  debtor  refuses  to  make  a  statement  either  to 
the  agencies  or  directly  to  the  house  from  which  he  is 
seeking  credit,  the  vital  question  arises:  What  is  the  rea- 
son for  this  refusal?  Is  it  because  he  knows  the  situa- 
tion that  would  be  disclosed  by  the  statement  would  lead  to 
a  withholding  of  credit,  or  is  there  some  other  reason  for 
his  refusal  ?  The  credit  man  should  investigate  this  phase 
of  the  question  with  sufficient  care  to  reach  a  correct  judg- 
ment on  the  existing  conditions  or  possibilities. 

It  is  probably  a  fact  that  if  all  merchants  seeking 
credit  would  make  property  statements  as  a  basis  for 
that  credit,  the  number  of  failures  would  be  greatly  re- 
duced and  credit-granting  would  be  placed  on  a  more 
stable  basis. 


84  MERCANTILE  CREDITS 

It  therefore  becomes  of  increasing  importance  that 
all  credit  departments  should  join  earnestly  in  the  cam- 
paign to  educate  applicants  for  credit  to  form  the  habit 
of  giving  the  signed  financial  statement  and  to  consider  it 
as  a  proper  business  custom,  which  is  beneficial  and  de- 
sirable to  debtor  and  creditor  alike. 


CHAPTER  VIII 

THE  PROPERTY  STATEMENT— CONTINUED 

Care  in  Using  Statements 

The  value  of  the  property  statement  will  depend  al- 
most entirely  on  the  way  it  is  treated.  The  credit  man 
who  said,  "Beware  of  statements,"  admitted  that  he  had 
in  mind  those  credit-dispensers,  who,  finding  a  statement 
of  assets  and  liabilities  in  the  agency  special  report, 
glanced  at  it  hastily,  noted  that  the  assets  were  consider- 
ably larger  than  the  debts,  let  it  go  at  that,  and  passed  on 
the 'credit.  There  is  no  doubt  that  such  a  method  is  dan- 
gerous. 

The  credit  man  should  consider  that  this  statement 
was  asked  for  and  desired  usually  in  a  case  requiring 
careful  consideration  and  that  his  decision  will  probably 
hinge  on  the  situation  it  will  disclose.  Therefore,  the 
analysis  must  be  careful  and  complete. 

Form  of  Statement 

The  form  of  the  property  statement  blank  is  of  im- 
portance where  statements  are  obtained  direct.  The  Na- 
tional Association  of  Credit  Men  has  for  many  years 
published  forms  adapted  to  different  lines  of  business 
and  any  house  considering  the  adoption  of  a  blank  to  be 
used  in  its  own  credit  department  would  find  an  advan- 
tage in  securing  a  copy  of  the  form  recommended  by  the 
national  office. 

A  consideration  of  the  form  used  by  the  mercantile 

85 


86  MERCANTILE  CREDITS 

agencies  may  oe  advantageous  at  the  outset,  as  these  forms 
have  been  arranged  or  developed  by  an  experience  of 
sixty  years  or  more  in  soliciting  signed  statements.  The 


STATEMENT    AS    A   6ASI8    COR    CREDIT   MAOB    TO 

THE  MERCANTILE  AGENCY.  R.  G.  DUN  &  Go. 


.DatetouUchaaittnuoftKtStt 


How  long  la  business  here? Whom  do  you  succeed,  if ; 

Where  from.  Town  and  State? 

Former  occupation! .. 


Bhrer  faflT  -  If  so,  when  and  where? 


Merchandise  on  band  at  cash  ralne,  .  I  -  Per  merchandise  not  due  (open  aoc'ft 

Outstanding  acc'ts  at  realizable  ralne,  -  For  merchandise  p~st  due  (open  *cc*tk 

Notes  receivable  at  resJteable  value»  »  -  Por  merchandise  (notes  payible)>  .    . 

Cash  on  band,  -    .........  _  -Loans  from  bank,     ....... 

Cash  In  bank.  .  4   .  «   .....  -  ._  Loans  from  friends  or  relatl-*    .    . 

Machinery,  Furniture  and  Fixture*.    .  _  Other  obligations,  consisting  «f  _ 

Other  pertmal  property.  conslsttmj  «f  --  . 


. , ,  Total  llabilltlea. 

Total  available  assets.     .    .    .  « Sarplns,     «.   .    . 

EEAL  ESTATES :  Describe,  locate  and  value  separately,  <Md«t  wAow  name  HM. 


Total  value  of  real  estate.    .    . 

Mortgages  or  amount  unpaid  thereon. 

Equity  in  real  estate, 

Total  worth  to  and  out  of  bustnei 


I»Q>e  statement  of  v«lnt  of  stock  on  band  made  upon  toe  baite  of  aa  bmotory  actually  eake&t  And  tf  §0, 
on  what  d**«»t  .._...__, .  v_ 

What  In  your  oplnion'U  the  total  amount  of  your  assets  and  of  four  liabilities'  as  they  are  at  the  date  of  sign- 
Ing  this  statement?  Total  assets,  « Total  liabilities,  * , 

Amount  of  CHATTEL  MORTGAGES*  li  any,  on  stock  or  futures.  « 

If  any  of  the  abore  accounts  are  pledged,  state  the  amount,  $ , . 

Art  there  any  existing  Uens  on  personal  property  not  mentioned  abovet    If  so,  what? 


Contingent  liabilities  upon  bills  of  exchange.  ondorseaentSr  guarantee*,  etc..  tV. 


Annual  business  amounts  to.  t Bank  •»*    •      -  - .  , 

Fma  PROTECTION.    State  Its  grnssal  nature— public  fire  department,  sprinkler  system.  Ore  extinguishers, 
night  watchman;  etc., -.-..•-  .  - 

INBURANCB:    On  merchandise,! n«  t^iMh^,  » 

Did  you  ever  suffer  a  ftw  losst ._    D  so.  when  tod  when? - 

Did  flrs  originate  on  your  r~"'**** 

Do  yon  carry  employer1  s  liability  Insurance? tr-Hi.  »m,r*i  ••*,***» ' ----—--—-—--— 

Date  of  signing  statement. 19 ^   ^ -— j- __- 


FIGURE  5. — Dun's  Form  of  Property  Statement. 

form  used   by   R.   G.   Dun  and   Company   is  given  in 
Figure  5. 


THE  PROPERTY  STATEMENT  87 

The  outstanding  fact  concerning  this  form  is  the  large 
number  of  items  of  information  which  the  agency  con- 
siders necessary  or  desirable  in  determining  the  credit 
and  capital  rating  of  the  firm  being  reported  on,  and  in 
making  up  a  special  report  giving  the  facts  and  conclu- 
sions which  dispensers  of  credit  may  consider  vital  or  im- 
portant as  a  basis  for  judging  the  credit  risk.  It  is  a 
bird's-eye  view  of  the  amount  of  information  necessary 
in  a  greater  or  less  degree  in  passing  every  credit. 

Simple  Form  Preferable 

At  the  same  time  the  credit  man  who  compares  this 
form  with  the  information  usually  furnished  in  a  special 
agency  report  reaches  the  conclusion  that  all  the  items 
called  for  in  the  blank  are  not  as  a  general  thing  included 
in  the  special  reports,  and  are  therefore  probably  not 
always  stated  by  the  maker  of  the  statement.  Conse- 
quently many  houses,  and  especially  the  larger  houses, 
seem  to  have  concluded  that  it  is  possible  to  ask  for  too 
much  information ;  and  by  using  a  form  that  is  too  com- 
plicated or  too  comprehensive,  loaded  down  with  all  man- 
ner of  details,  they  may  defeat  the  primary  object  in  view, 
viz.,  obtaining  the  statement. 

This  inference  is  drawn  after  examining  a  number  of 
forms  used  by  houses  doing  a  large  volume  of  business 
and  who  make  a  special  effort  to  simplify  the  form  in  use, 
so  that  it  shall  call  for  only  the  most  important  items  and 
shall  not  discourage  at  the  outset  the  merchant  who  is 
called  on  to  fill  out  and  sign  the  blank.  The  form  shown 
in  Figure  6  is  a  composite  from  the  blanks  used  by  sev- 
eral such  houses. 

An  examination  of  this  form  will  show  that  it  covers 
what  are  usually  considered  vital  points  in  an  investiga- 
tion, and  probably  even  more  information  than  usually 


88 


MERCANTILE  CREDITS 


accompanies  the  special  reports  of  the  mercantile  agencies 
which  include  financial  statements.    This  view  is  of  course 


STATEMENT 

Dated  at 


Address. 

Corporation _.. 

Partners  Names.. 


......Capital  Stock,*.. 


Paid  in,  I 
.Married  or  Single....... 

..Married  or  Single™ 


.Married  or  Single 

true  showing  of .business  affairs 


1 present  the  following  as 

and  financial  worth  at  this  date,  .for  the  purpose  of  obtaining  a  line  of  Credit  from 

Adams  and  Brown,  Chicago 

ASSETS  LIABILITIES 

Merchandise  at r  Value  .  ft Accounts  Payable  Mdse.  Not  Due  9 

Accounts  Receivable  (good)  .  $..-....... 

Notes  Receivable  (good)    .       .  $ 

Cash  on  Hand  and  in  Bank      .  $ 

OUier  Personal  Property    .  .  $ 


Accounts  Payable  Mdse.  Past  Due  $.„... _.... 

Notes  Payable     ...       ....  ft 

Borrowed  Money  from  Bank  .   .  •$ 

Borrowed  Money  from  Other*  .  ft- 

How  Secured - 


Total 


Total     .    . 


.  8. 


Net  Worth 


Real  Estate  (exempt) 

Real  Estate  {not  exempt) 
In  Whose  Name? ,. 


Encumbrance  on  Real  Estate 


Date  of  Inventory 

Insurance  on  Mdse. ft.., 

Burglary  Insurance $.... 

Insurance  on  Other  Property  .   .  ft... 
Annual  Sales  (last  year)    ....  ft... 

How  Long  in  Business.._..____. 

Bank  With. 


Are  any  of  accounts  receivable,  sold  or  pledged? _ 

References:    (Houses  from  whom  you  buy  on  credit.) 


... .certify  that  the  above;  as  printed  and  written  is  correct;  that  there  is  noother  in- 
debtedness than  above  stated;  and  that..-...: will  promptly  notify  said.  Adams 

and  Brown   cLany  change  in ; .business  affairs  affecting  above  statement 


FIGURE  6.—  Form  of  Property  Statement  Used  by  Several  Com- 
mercial   Houses. 


subject  to  modification  for  those  lines  of  business  which 
extend  very  large  lines  of  credit  and  which  are  in  a  posi- 


THE  PROPERTY  STATEMENT  89 

tion  to  ask  or  demand  that  minute  detail  which  is  neces- 
sary to  a  very  close  scrutiny  of  the  risk. 

For  the  average  retail  merchant,  however,  to  whom 
the  filling  out  of  a  complicated  statement  blank  would  be 
quite  a  task,  a  form  combining  simplicity  with  only  the 
vital  details  seems  to  be  the  most  satisfactory  and  suc- 
cessful. 

Annual  Sales — Key  to  Statement  Analysis 

As  a  starting  point  in  the  analysis  of  a  statement  it 
should  be  kept  in  mind  that  this  cannot  be  done  in  a  per- 
functory or  hasty  manner.  The  statement  is  being  relied 
on  usually  in  doubtful  cases,  and  in  testing  it  for  accuracy 
and  for  what  it  really  shows  as  to  the  condition  of  the  ap- 
plicant's business,  comparison  should  also  be  made  with 
all  other  items  of  information  in  the  file. 

The  key  to  the  analysis  of  the  statement  is  the  amount 
of  annual  sales.  If  this  item  is  not  given  in  the  statement, 
every  effort  should  be  made  to  obtain  it,  for  it  is  a  stand- 
ard of  measurement  by  which  other  items  should  be 
tested. 

In  the  analysis  of  assets,  the  first  item  as  a  rule  is 
merchandise  or  inventory.  An  important  item  of  infor- 
mation, usually  shown  or  required  by  the  blank,  is :  Was 
the  inventory  taken  at  cost  or  market  price?  This  ques- 
tion is  vital  when  market  values  are  fluctuating  in  a  wide 
range.  In  normal  times  it  is  safe  to  value  it  at  cost 
price. 

Important  Points  of  Analysis 

Compare  the  merchandise  item  with  the  average  of 
monthly  sales,  taking  into  account  the  customary  terms 
in  that  line  of  trade.  How  many  months'  sales  are  repre- 
sented in  the  inventory,  or  merchandise  on  hand?  If  the 


90  MERCANTILE  CREDITS 

usual  terms  in  the  line  are  2/10  net  30  or  net  60,  how 
many  months'  sales  are  on  hand  ?    This  test  may  show : 

1.  Whether  the  investment  in  merchandise  is  too  large. 

2.  If  the  amount  is  excessive  it  may  indicate  a  failure  to 

buy  carefully,  or  that  there  is  too  much  dead  stock 
being  carried. 

3.  It  will  show  whether  the  rate  of  turnover  on  capital 

invested  is  in  keeping  with  good  merchandising  in 
that  line  of  goods. 

4.  If  there  is  an  overstock  of  merchandise  the  comparison 

with  monthly  sales  is  usually  the  only  method  by 
which  that  fact  may  be  ascertained. 

5.  Compare  the  amount  of  merchandise  with  insurance 

carried. 

6.  Note  the  date  of  the  inventory.     Is  it  at  the  close  of 

the  season,  when  merchandise  should  be  at  low-water 
mark?  If  the  statement  covers  a  manufacturing 
business  the  inventory  should  be  given  under  three 
headings : 

(a)  Finished  goods. 

(b)  Goods  in  process. 

(c)  Raw  material. 

7.  Supplies  should  never  be  included  in  a  manufacturing 

inventory;  they  are  not  quick  assets,  but  belong  in 
the  expense  account. 

Pricing  the  Inventory 

In  such  an  inventory  the  manner  of  pricing  should  al- 
ways be  given.  In  a  manufacturing  inventory  of  a  going 
business  "finshed  goods"  can  always  be  regarded  as  a 
quick  asset.  They  usually  will  be  quickly  sold.  Goods  in 
process  may  not  be  so  readily  liquidated.  It  may  be  diffi- 
cult to  estimate  how  much  additional  cash  must  be  put 
into  labor  and  material  to  get  them  ready  to  market. 

Raw  material  may  be  readily  salable,  or  it  may  have 
scarcely  any  value  at  all  under  liquidation.  The  character 


THE  PROPERTY  STATEMENT  91 

of  the  business  will  determine  this.  Bar  iron  and  steel  of 
regular  market  sizes  may  convert  quickly  into  cash.  So 
of  textile  goods,  if  they  are  in  pieces  not  yet  cut.  But  if 
the  material  is  of  special  designs,  shapes,  or  sizes  adapted 
only  to  use  in  the  particular  patented  specialty  article 
being  manufactured  by  that  firm,  it  might  prove  entirely 
unsalable  and  unusable  elsewhere  and  therefore  worth 
only  junk  value  under  liquidation.  It  becomes  a  matter  of 
circumstances  with  each  particular  case. 

Further,  in  regard  to  merchandise  or  inventory,  is  it 
an  actual  inventory,  or  only  a  book  estimate?  When  the 
amounts  given  in  any  statement  are  in  round  numbers, 
omitting  dollars  and  cents,  it  is  usually  evidence  that  the 
values  are  estimates  and  not  actual  figures,  and  such  state- 
ments raise  a  doubt  at  the  start.  By  a  study  of  the  mer- 
chandise item  in  statements,  the  credit  man  will  become 
experienced  in  determining  whether  it  is  too  high  either 
from  overbuying,  from  dead  stock,  overpricing,  or  de- 
liberately overstating. 

Accounts  Receivable 

A  first  consideration  of  accounts  receivable  should  de- 
termine, if  possible,  that  they  all  result  from  merchandise 
transactions  and  do  not  include  liabilities  of  individuals  or 
members  of  the  firm  which  may  be  uncertain  as  to  ma- 
turities or  value.  These  latter  accounts  should  be  elim- 
inated if  they  can  be  identified. 

Next  compare  the  receivables  with  monthly  sales,  tak- 
ing into  account  the  customary  terms  in  the  line.  If  sixty 
days  represents  the  longest  term,  are  there  more  than  two 
months'  sales  outstanding?  Keep  in  mind  that  in  most 
lines  of  trade  at  least  one-half  the  customers  will  take  cash 
discount  on  the  average.  Therefore  accounts  receivable 
representing  sales  for  two  months  or  more  will  indicate 


92  MERCANTILE  CREDITS 

that  either  unwise  credits  are  being  given,  or  collections 
are  being  neglected,  or  both.  The  firm  may  also  be  carry- 
ing doubtful  and  worthless  accounts  as  live  assets. 

If  the  usual  terms  are  thirty  days  net,  then  more  than 
one  month's  sales  outstanding  will  indicate  that  something 
is  out  of  balance,  or  that  the  business  is  not  being  well 
managed.  Where  the  policy  of  the  house  is  to  sell  on 
longer  terms  than  regular,  or  to  grant  extensions,  the 
chance  for  loss  and  shrinkage  is  greater. 

Notes  Receivable 

Under  the  item,  "notes  receivable,"  the  first  question 
to  arise  will  be,  does  the  character  of  the  business  and  its 
usual  terms  of  sale  warrant  taking  note  settlements  ?  Are 
the  notes  taken  in  the  regular  course  of  business,  and  is 
it  customary  in  that  line?  If  not,  then  this  item  may 
represent  extensions  on  accounts  already  past  due,  and 
put  into  note  settlements  so  that  they  are  drawing  interest. 
These  are  not  a  desirable  asset,  as  they  may  be  doubtful. 

The  same  test  should  apply  to  notes  as  to  accounts — 
are  they  the  outgrowth  of  merchandise  transactions  in  the 
usual  course  of  trade?  If  they  are  in  settlements  of  loans 
to  individuals  or  to  cover  overdrafts  on  accounts  by  mem- 
bers of  the  firm,  they  should  be  eliminated  as  quick  assets. 
If  trade  acceptances  are  being  taken  by  the  firm  and 
classed  as  notes,  the  statement  should  indicate  the  fact. 

Fixed  Assets 

This  usually  includes  real  estate,  buildings,  machinery, 
and  tools. 

A  first  consideration  of  this  item  is  that  it  is  not  a 
liquid  asset  and  not  available  for  paying  bills.  The  next 
question  is — how  much  of  the  firm's  capital  or  resources 
is  tied  up  in  this  item?  Is  the  investment  out  of  proper- 


THE  PROPERTY  STATEMENT  93 

tion  to  the  resources,  making  the  firm  short  on  working 
capital?  Is  there  a  bond  issue  or  mortgage  against  the 
property?  If  not,  this  item  might  be  of  some  value  as  a 
last  resort  in  case  of  any  financial  difficulty ;  but  it  should 
be  considered  only  as  a  secondary  line  of  defense. 

Is  there  a  charge-off  against  buildings  and  machinery 
for  annual  depreciation,  and  is  it  adequate  ?  This  applies 
to  manufacturing  plants.  A  good  plant  free  from  en- 
cumbrance might  give  the  owner  additional  working  cap- 
ital in  an  emergency  through  the  medium  of  a  bond  issue 
or  mortgage. 

This  item  in  the  case  of  a  retail  merchant  might  mean 
that  he  owns  his  place  of  business.  It  will  always  be  a 
question  whether  he  is  better  off  for  having  a  part  of  his 
resources  invested  in  that  way.  If  he  owns  a  flat  build- 
ing, living  upstairs  and  having  his  store  downstairs,  and 
the  building  is  located  on  a  business  street  where  apprecia- 
tion of  values  helps  him  out,  it  may  prove  a  good  invest- 
ment. He  can  stay  there  as  long  as  he  wishes  and  no 
competitor  can  bid  his  lease  away  from  him,  forcing  him 
to  move  at  the  expense  of  a  loss  of  trade. 

If,  on  the  other  hand,  he  has  bought  a  building  on 
contract,  just  for  the  sensation  of  owning  real  estate,  and 
must  pay  so  much  every  month  or  lose  his  investment,  his 
condition  may  become  precarious.  If  in  keeping  up  the 
monthly  payments  he  begins  to  lose  out  on  cash  discounts, 
gets  past  due  on  his  merchandise  purchases,  and  his  credit 
becomes  impaired,  he  may  lose  out  entirely.  It  becomes 
a  question  of  circumstance,  judgment,  location,  and 
amount  of  capital  the  merchant  may  have  accumulated 
before  venturing  on  a  real  estate  investment. 

In  a  country  town  the  risk  of  investment  may  not  be 
so  great,  but  the  majority  of  merchants  seem  to  be  more 
successful  as  renters,  keeping  their  resources  earning  36 


94  MERCANTILE  CREDITS 

to  50  per  cent  per  annum  on  cash  discounts.  In  the  larger 
cities  there  is  always  the  risk  of  special  assessments,  the 
shifting  of  the  business  center,  the  building  of  an  elevated 
railroad,  an  order  for  track  elevation,  or  the  changes  in  a 
residential  district,  which  add  to  the  risk  of  ownership  of 
real  estate. 

Liabilities — Accounts  Payable 

In  considering  the  liability  part  of  the  statement  a 
primary  fact  claims  attention.  There  will  be  no  shrink- 
age on  these  items.  If  there  is  any  change,  it  will  be  an 
increase. 

Are  any  of  the  accounts  payable  past  due?  If  the 
statement  does  not  cover  that  point  it  may  be  learned 
from  other  information  in  the  credit  file.  It  is  a  vital  fact 
to  be  determined  if  possible. 

The  next  step  is  to  compare  the  amount  of  this  in- 
debtedness with  the  merchandise  account.  This  test  will 
show  whether  the  firm  is  taking  cash  discounts  or  not, 
for  if  it  owes  an  amount  equal  to  any  considerable  part 
of  the  merchandise  it  is  not  only  not  discounting  but 
there  may  be  evidence  that  part  of  the  indebtedness  is 
overdue.  A  comparison  with  the  monthly  sales  will  give 
a  very  close  estimate  as  to  what  the  monthly  purchases 
should  be,  making  due  allowance  for  stocking  up  on  sea- 
sonal requirements. 

Any  indication  that  the  firm  is  not  discounting  its 
purchases  raises  a  very  material  question  at  once  as  to  its 
credit  standing.  It  indicates  a  lack  of  working  capital  and 
it  may  be  a  symptom  of  more  serious  weakness. 

Notes  Payable  to  Bank 

"Notes  payable,"  if  of  any  considerable  amount,  is  a 
cause  for  searching  investigation.  The  notes  to  bank  and 


THE  PROPERTY  STATEMENT  95 

those  given  for  merchandise  or  other  indebtedness  should 
always  be  stated  separately.  It  should  always  be  shown 
whether  the  notes  to  the  bank  are  secured  and  how.  If 
there  is  a  credit  report  from  the  bank  it  should  be  studied 
in  connection  with  the  indebtedness  to  the  bank.  Is  the 
latter  prepared  to  continue  this  line  of  banking  credit, 
or  is  it  likely  to  be  withdrawn?  Is  the  paying  record  of 
the  firm  satisfactory  to  the  bank?  If  they  have  taken 
security  for  their  loan,  it  is  a  sure  indication  that  the 
bank  does  not  consider  the  credit  standing  of  the  firm 
satisfactory  on  its  own  name  alone.  The  amount  of  the 
bank  loan  should  be  compared  with  what  would  be  a 
reasonable  requirement  for  bank  accommodations. 

Other  Notes  Payable 

If  notes  payable  are  for  merchandise,  why  have  they 
been  given?  If  the  line  of  business  requires  long  terms 
on  the  purchases,  the  notes  may  be  given  in  accordance 
with  terms  of  purchase  contract,  and  for  the  convenience 
of  the  creditors.  Such  an  arrangement  would  be  entirely 
regular  though  it  would  indicate  that  the  purchases  were 
not  being  discounted.  If  they  are  trade  acceptances  en- 
tered as  notes,  then  the  transactions  would  not  indicate 
any  weakness  of  credit  position.  If,  however,  these  notes 
represent  settlements  of  past-due  purchase  accounts  and 
are  drawing  interest,  it  ordinarily  indicates  that  the  credit 
of  the  firm  is  being  strained.  The  credit  man  should  be 
sure  that  he  knows  just  what  this  situation  really  means. 

If  there  are  still  other  notes,  to  individuals  or  to 
friends,  it  should  be  known  whether  such  notes  are  se- 
cured and  how.  The  nature  of  the  transaction  and  the 
consideration  for  which  the  notes  were  given  should  be 
disclosed  and  the  dates  of  maturities,  if  they  must  be 
paid  when  due,  should  also  be  shown. 


96  MERCANTILE  CREDITS 

Other  Liabilities 

If  there  is  any  bond  or  mortgage  indebtedness  the 
maturities  should  be  shown,  and  the  ability  of  the  firm 
to  meet  such  obligations  at  maturity  be  carefully  weighed. 
Is  a  reserve  fund  being  established  for  that  purpose  ? 

Does  the  statement  show  any  accrued  liabilities,  such 
as  a  reserve  for  taxes  ?  Such  contingent  liabilities  usually 
exist.  Another  form  of  contingent  liability  should  be 
investigated.  Some  firms  take  note  settlements  and  trade 
acceptances  from  their  customers  and  discount  such  paper 
with  banks.  A  certain  amount  of  contingent  liability  fol- 
lows the  indorsement  of  such  paper  and  this  should  be 
considered. 

Danger  from  Sale  of  Accounts 

A  question  that  appears  or  should  appear  on  all  state- 
ment blanks  has  a  very  important  bearing :  "Have  any  of 
your  accounts  been  sold  or  pledged  ?" 

There  are  firms  which  specialize  in  this  line  of  busi- 
ness, and  in  soliciting  prospective  customers  they  use  the 
argument  that  the  sale  of  their  accounts  can  be  handled 
in  a  confidential  way  and  without  publicity.  The  argu- 
ment is  also  used  that  the  money  obtained  as  proceeds 
of  the  sale  can  be  used  in  discounting  purchases  and  the 
transaction  therefore  will  be  very  profitable.  Following 
out  the  thought  of  no  publicity  sometimes  leads  the  firm 
selling  their  accounts  in  this  way  to  keep  them  on  their 
books  as  an  asset,  while  the  cash  received  from  the  sale 
shows  as  a  liability. 

Public  accountants  who  have  had  occasion  to  audit  the 
books  of  firms  selling  their  accounts  receivable  in  this  way 
comment  on  it  as  a  dangerous  practice.  Cases  have  been 
cited  where  the  handling  of  business  in  this  way  has  cost 
the  selling  firm  from  25  to  30  per  cent  for  the  use  of 


THE  PROPERTY  STATEMENT  97 

money.  Having  once  commenced  following  this  policy, 
they  find  it  exceedingly  hard  to  discontinue  it.  The  expe- 
rience of  credit  men  with  the  plan  has  been  uniformly 
unsatisfactory;  hence  the  answer  to  the  question  regard- 
ing this  situation  has  an  important  bearing  on  the  cus- 
tomer's credit. 

Uninventoried  Merchandise 

Under  the  heading  of  merchandise  liabilities  it  some- 
times happens  that  at  the  close  of  the  season  and  just 
before  inventory  time  in  certain  lines,  considerable  quan- 
tities of  goods  are  bought  and  have  already  been  received. 
They  are  not  inventoried,  and  the  invoices  are  not  entered 
up  until  the  following  month.  The  houses  consider  that 
one  offsets  the  other.  But  creditor  firms  in  such  lines 
of  business  have  questions  in  their  statement  blanks  to 
bring  out  this  situation,  because  under  such  a  method,  a 
merchandise  liability,  sometimes  for  a  large  amount,  has 
been  actually  created  though  not  shown  on  the  books. 

Ratio  of  Assets  to  Liabilities 

In  endeavoring  to  verify  the  accuracy  of  a  financial 
statement  every  part  of  it  should  be  carefully  scanned  in 
its  relation  to  every  other  part,  as  well  as  compared  with 
all  other  information  in  the  credit  file. 

It  is  usually  considered,  in  comparing  assets  with 
liabilities,  that  a  proportion  of  $2  of  assets  for  every 
dollar  of  liability  is  a  safe  ratio,  and  there  are  very  few 
cases  where  this  would  not  be  within  the  bounds  of  safety. 
In  making  the  comparison,  however,  only  the  actual  liquid 
assets  should  be  considered  and  they  should  first  be  sub- 
jected to  a  reasonable  shrinkage. 

In  some  lines  of  business  and  with  some  firms  many 
credit  men  consider  a  proportion  of  $1.50  of  assets  to  $i 


98  MERCANTILE  CREDITS 

of  liability  as  a  safe  ratio.  This,  however,  would  probably 
not  be  accepted  as  a  general  rule. 

In  testing  the  general  situation  revealed  by  many 
property  statements  where  an  element  of  risk  seems 
apparent,  the  credit  man  may  find  it  an  aid  to  decision  to 
ask  himself  this  question :  "Can  I  take  this  business  under 
the  conditions  disclosed  by  this  statement  and  make  it 
pay  out;  and  just  how  would  I  do  it?" 

If  he  cannot  figure  out  the  way  to  reach  the  desired 
result,  perhaps  the  maker  of  the  statement  is  not  going 
to  be  able  to  work  it  out  successfully  either. 

How  Statements  May  Save  Loss 

From  the  foregoing  method  of  analyzing  a  statement, 
the  credit  man  may  draw  the  following  inference:  If  so 
much  care  is  required  in  reaching  a  decision  on  a  credit 
when  a  statement  has  been  furnished,  how  much  more 
difficult  would  it  be  to  reach  a  correct  judgment  without 
the  aid  of  a  statement. 

The  credit  man  previously  referred  to,  who  said, 
"Beware  of  statements,"  submitted  two  examples  from 
his  own  experience  to  illustrate  the  care  which  must 
be  exercised  in  scrutinizing  the  assets  and  liabilities  in 
a  signed  financial  statement.  Both  cases  developed  in 
checking  up  the  orders  for  the  approaching  season,  and  in 
each  instance  there  was  reason  for  a  close  investigation 
because  of  the  manner  of  payment  on  the  indebtedness 
from  the  previous  season. 

One  statement  was  as  follows : 

Assets 

Cash  on  hand $     130.60 

Accounts   receivable    1,806.72 

Furniture   and   fixtures 2,690.00 

Merchandise  33.5I7-9I 


Total $38,145-23 


THE  PROPERTY  STATEMENT  99 

Liabilities 

Notes  payable  to  bank $  8,500.00 

Notes  payable  for  merchandise 12,338.20 

Due  bank   (overdraft) 21.23 

Surplus    17,285.80 

Total $38,145-23 

By  the  ordinary  tests  this  statement  showed  a  ratio  of 
assets  to  liabilities  almost  two  to  one.  The  furniture  and 
fixtures  item  was  eliminated  as  not  being  a  liquid  asset 
available  for  paying  debts,  but  this  still  left  a  reasonable 
excess  of  assets.  The  merchandise  item  was  out  of  pro- 
portion, but  the  difficulty  in  securing  merchandise  in  the 
year  in  which  the  statement  was  made,  because  of  scarcity 
of  material  and  the  rapidly  advancing  prices,  did  not 
make  the  size  of  the  inventory  subject  to  serious  criticism. 
Stating  the  figures  in  dollars  and  cents  gave  the  statement 
the  earmarks  of  having  been  taken  from  the  books  and  of 
showing  an  actual  and  not  an  estimated  inventory. 

In  comparing  the  statement  with  other  information  in 
the  credit  file,  the  report  from  the  bank  with  which  the 
merchant  did  business  came  under  scrutiny.  This  report 
was  not  very  definite,  merely  stating  in  effect  that  the 
firm  had  been  in  business  for  many  years  with  a  record 
for  meeting  their  obligations.  Comparing  the  size  of  the 
bank  loan  with  the  cash  on  hand  and  the  other  indebted- 
ness, the  credit  man  determined  to  write  the  bank  stating 
the  amount  of  the  order  he  had  under  consideration  and 
inquiring  if  the  bank  would  tell  him  whether  the  amount 
of  their  loan  to  this  merchant  was  in  proportion  to  his 
usual  borrowing  line  and  whether  they  expected  to  con- 
tinue to  extend  to  him  this  amount  of  banking  accom- 
modation. The  bank  did  not  reply  to  the  letter.  The 
credit  man  inferred  from  their  silence  that  they  con- 
templated closing  out  their  loan.  He  decided  to  turn  down 


loo  MERCANTILE  CREDITS 

the  order,  and  collect  what  the  merchant  then  owed  his 
house  as  quickly  as  possible.  He  succeeded  in  carrying 
out  the  plan. 

A  fortnight  later  he  received  an  agency  report  stating 
that  this  merchant  was  financially  embarrassed.  The 
assets  were  believed  to  be  about  $15,000  and  the  liabilities 
were  estimated  at  about  $33,000.  By  having  a  financial 
statement  and  by  making  the  proper  analysis  of  it  the 
credit  man  felt  that  his  house  had  escaped  a  loss,  and 
that  the  statement  was  evidently  false. 

Another  Example 

The  other  case  represented  a  different  situation.  The 
statement  was  as  follows : 

Assets 

Merchandise  on  hand  at  cash  value $24,000.00 

Accounts  at  realizable  value   (collectible) 4,000.00 

Cash  500.00 


Total $28,500.00 

Liabilities 

Accounts  payable  for  merchandise $  5,000.00 

Notes  payable  (to  bank) 2,000.00 

Capital  8,600.00 

Surplus    12,900.00 


Total $28,500.00 

This  statement  showed  assets  amounting  to  about  four 
times  the  liabilities,  but  the  figures  were  given  in  round 
numbers,  indicating  that  they  were  estimates.  The  "ac- 
counts payable  for  merchandise"  attracted  the  attention 
of  the  credit  man  at  once,  and  on  calling  for  the  ledger 
information  he  found  that  this  merchant  was  then  owing 
his  house  about  $5,900,  and  the  credit  file  indicated  in- 
debtedness to  other  houses  of  several  thousands  of  dollars. 
The  statement  was  false  on  its  face. 


THE  PROPERTY 

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CAUTION 
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Record  of  Judgments' 

102  MERCANTILE  CREDITS 


Without  the  statement  this  probable  intention  to  de- 
fraud might  not  have  been  discovered  in  time.  The 
account  of  course  was  closed  as  quickly  as  possible  and 
the  pending  order  was  courteously  turned  down. 

Very  many  large  houses  with  a  large  number  of  cus- 
tomers find  it  advantageous  to  make  a  summary  of  the 
information  obtained  through  the  credit  file  by  means  of 
what  is  called  a  "credit  brief."  The  form  given  in  Figure 
7  is  used  by  a  house  in  the  steel  and  iron  trade. 

When  this  brief  is  checked  up  by  the  credit  man  him- 
self, or  by  the  assistants  who  pass  on  credits  in  various 
territories,  it  leads  to  a  closer  familiarity  with  the  ac- 
counts and  greatly  expedites  the  handling  of  orders. 


CHAPTER  IX 

WHY  MEN  FAIL  IN  BUSINESS 

Percentage  of  Failures 

It  has  been  frequently  stated  either  by  platform  speak- 
ers or  in  written  discussion  that  from  90  to  95  per  cent  of 
those  who  engage  in  business  fail  sooner  or  later  in  their 
business.  This  statement  was  made  usually  for  moral 
effect  or  to  emphasize  some  other  argument. 

Any  business  man  who  weighs  the  import  of  the  state- 
ment will  decide  that  it  is  not  true.  He  knows  that  if  any 
large  percentage  of  those  to  whom  he  extends  credit  were 
unavoidably  to  fail,  his  own  enterprise  could  not  succeed. 

Some  years  ago  a  credit  man  desiring  to  know  the 
facts  concerning  the  above  statement  addressed  a  letter 
to  the  Bradstreet  Company,  asking  whether  any  definite 
statistics  could  be  obtained  as  to  the  number  of  those 
who  fail  in  business. 

The  agency  wrote  a  letter  in  reply  of  which  the  follow- 
ing is  a  summary : 

In  answer  to  your  inquiry  we  beg  to  say  that  at  the  very  outset 
we  must  determine  as  to  what  is  meant  by  failure  in  business.  Is 
it  failure  to  meet  and  pay  obligations  in  full?  Or  is  it  simply 
failure  to  succeed  in  a  mercantile  undertaking? 

There  are  two  classes  who  are  considered  unsuccessful — one 
composed  of  those  whose  creditors  share  their  losses;  the  other, 
who,  while  meeting  their  business  obligations,  lose  their  capital 
wholly  or  in  part  and  are  recognized  as  having  been  unsuccessful. 

Of  the  first  class  Bradstreet's  is  in  possession  of  very  com- 
plete figures  covering  a  long  series  of  years.  Examining  our 

103 


104  MERCANTILE  CREDITS 

records  we  find  that  the  average  failures  for  each  year  is  about 
i%  of  the  firms  rated  in  our  volume.  In  answer,  therefore,  to 
the  question,  "Do  90%  of  all  persons,  who  engage  in  business,  fail 
to  pay  their  debts?"  we  would  say  emphatically,  "No."  The  evi- 
dence we  have  collected  indicates  that  the  average  business  life- 
time of  firms  is  about  fifteen  years,  and  you  can  therefore  quickly 
determine  from  this  that  15%  of  those  who  engage  in  business 
fail  and  fail  to  pay  all  of  their  debts. 

If  your  question  is  so  broad  as  to  include  both  classes — those 
who  fail  to  pay  all  their  debts  and  those  who  fail  to  succeed — then 
the  percentage  would  be  larger,  but  how  much  larger,  it  would 
be  impossible  to  determine. 

Causes  of  Failure 

The  Bradstreet  Company  has  published  annually  for 
many  years  a  pamphlet  which  they  call  "A  Record — Not 
a  Prospectus."  This  gives  the  statistics  of  failures  for  the 
United  States  and  Canada.  These  failures  are  classified 
according  to  the  causes  which  produced  them.  The  causes 
are  enumerated  in  two  divisions  as  follows : 

Class  A.     Due  to  faults  of  those  failing : 

Incompetence  (irrespective  of  other  causes). 

Inexperience  (without  other  incompetence). 

Lack  of  capital. 

Unwise  credits. 

Speculation  (outside  of  regular  business). 

Neglect  of  business  (due  to  bad  habits). 

Personal  extravagance. 

Fraudulent  disposition  of  property. 
Class  B.     Not  due  to  faults  of  those  failing: 

Specific  conditions  (disasters,  wars,  floods,  etc.). 

Failures  of  others  (apparently  solvent  debtors). 

Competition. 

All  students  of  credits  are  advised  to  secure  a  copy  of 
this  pamphlet  for  any  year  and  give  it  careful  study.  The 
agency  will  furnish  it  on  request.  The  benefit  of  such 


WHY  MEN  FAIL  IN  BUSINESS  105 

study  may  be  stated  in  this  way:  If  certain  causes  are 
known  by  experience  to  result  in  failure,  then  the  ex- 
amination of  credit  information  should  determine  whether 
any  of  these  causes  are  in  evidence  as  affecting  the  appli- 
cant for  credit.  If  their  presence  can  be  detected,  then 
the  credit  had  better  be  refused.  It  becomes  a  question 
of  recognizing  the  symptoms  in  time,  and  involves  reason- 
ing from  cause  to  effect. 

Study  of  Failure  Statistics 

In  making  such  a  study  the  relative  importance  of  each 
cause  may  be  determined  from  the  tabulations  made  by 
the  agency.  In  1917  there  were  14,139  failures  in  the 
United  States  and  Canada  out  of  a  total  of  nearly  two 
million  names  reported  on.  The  table  of  causes  with  per- 
centage ratio  to  the  total  is  as  follows: 

1917  UNITED  STATES    1917  CANADA 

Incompetence   35-5%  16.3% 

Inexperience    6.8  6.2 

Lack  of  capital 31.9  37.5 

Unwise  credits 1.9  2.3 

Extravagance .6  .3 

Neglect  of  business 2.2  2.5 

Speculation  .4  2.5 

Fraud  5.7  5.9 

85%  73-5% 

Specific  conditions 1 1 .9%  25 . 4% 

Failures  of  others i.o  .8 

Competition  2.1  .3 

15  26.5 

100%  100% 

In  grouping  these  causes  by  the  three  Cs  for  the 
United  States: 


106  MERCANTILE  CREDITS 

Capital,  or  lack  of  it 31 .9% 

Capacity,  or  lack  of  it 47.4 

Character,  or  lack  of  it 5.7 

Within  control  of  debtor 85% 

Causes  beyond  control  of  debtor 15 

100% 
Importance  of  Capital 

Such  a  comparison  provides  a  standard  of  measure^ 
ment.  In  previous  years  "lack  of  capital"  showed  the 
largest  percentage,  but  "incompetence"  has  taken  the 
lead,  probably  because  the  year  1917  represented  rising 
markets,  when  capital  was  subjected  to  less  strain  and 
when  a  larger  number  of  persons  entered  business  under- 
takings without  sufficient  experience.  The  percentage  of 
fraud  ("lack  of  character")  is  relatively  low. 

Another  interesting  test  is  shown  by  a  table  under  the 
heading  of  "Capital  Employed  by  Those  Who  Failed," 
which  is  as  follows : 

Total  number  of  failures  in  the  U.  S.  and  Canada  for  1917.   14,139 
Total  failures  with  capital  of  $5,000  or  less 13,304 


Total  failures  with  capital  of  over  $5,000 835 

The  failures  with  less  than  $5,000  capital  were  94.1 
per  cent  of  the  entire  number. 

This  large  percentage  surely  indicates  that  insufficient 
capital  is  a  fruitful  cause  of  failures  in  business,  and  this 
fact  stands  out  so  prominently  that,  as  previously  stated, 
one  credit  authority  advances  the  theory  that  engaging  in 
business  without  sufficient  capital  should  be  classed  also 
as  evidence  of  incompetence. 

Against  this  theory  is  the  claim,  referred  to  in  a 
previous  chapter,  that  the  great  majority  of  successful 
merchants  began  in  a  small  way  with  moderate  resources 
and  built  up  to  their  present  financial  strength.  It  is  evi- 
dent that  all  firms  making  such  a  record  were  content  to 


WHY  MEN  FAIL  IN  BUSINESS  107 

trade  within  the  limits  of  their  capital  resources  and  that 
those  who  failed  with  capital  ratings  of  $5,000  or  less, 
easily  made  the  mistake  of  overtrading  on  their  capital 
and  as  a  result  met  financial  disaster. 

One  writer  on  credits,  in  considering  this  large  per- 
centage of  failures  in  the  class  with  little  or  no  capital, 
thinks  it  possible  that  if  the  total  number  of  firms  re- 
ported as  having  less  than  $5,000  capital  were  considered, 
it  might  be  found  that  the  percentage  of  those  failing 
would  be  no  larger  than  with  firms  rated  over  $5,000.  He 
admits  that  there  is  no  convenient  way  to  demonstrate  the 
accuracy  of  this  suggestion. 

If  anyone  wishes  to  test  this  theory,  it  could  be  done 
by  tabulating  the  firms  reported  in  a  few  pages  of  a  rating 
book  and  comparing  the  total  of  ratings  having  $5,000 
and  less  with  those  having  higher  ratings.  Such  a  com- 
parison would  clearly  show  that  the  proportions  do  not 
support  the  claim  above  stated. 

Proofs  of  Incompetence 

Inasmuch  as  so  large  a  percentage  of  failures  results 
from  incompetence,  inexperience,  and  kindred  causes,  a 
credit  student  making  an  analysis  of  a  credit  file  should 
consider  what  symptoms  or  conditions  indicate  a  lack  of 
capacity.  In  making  a  tabulation  of  these  causes,  he 
would  discover  the  following  to  be  the  most  prolific: 

Overbuying  or  careless  buying. 
Poor  collection  system. 

Poor    accounting    methods,    which    includes    a    failure 
properly  to  figure  profits  and  the  cost  of  doing  business. 
Poor  business  location. 

Lack  of  enterprise  (sometimes  called  "dry  rot"). 
Poor  display  of  goods. 
Lack  of  volume  (slow  turnover). 
Wasteful  advertising. 


io8  MERCANTILE  CREDITS 

Under  "inexperience"  he  would  tabulate: 

Unwise  credit-granting. 
Speculation  outside  of  business. 
Neglect  of  business. 
Personal  extravagance. 

Injudicious  Advertising 

A  few  years  ago  the  Chicago  credit  men  in  a  certain 
line  of  trade  discovered  by  interchange  of  ledger  experi- 
ence that  all  their  customers  in  a  good-sized  town  buying 
in  their  market  were  becoming  slow  pay.  Most  of  them 
formerly  had  taken  cash  discounts.  The  condition  was 
so  general  that  it  suggested  some  underlying  cause  that 
ought  to  be  explained.  They  decided  to  send  an  investi- 
gating committee  to  locate  the  cause.  This  committee 
spent  a  few  days  in  the  town,  and  on  their  return  re- 
ported that  the  merchants  of  that  town  were  losing  out  as 
the  result  of  unwise  and  excessive  advertising.  The  con- 
clusions reached  were  placed  before  the  merchants  and  the 
necessary  remedy  suggested.  The  desired  reform  was 
accomplished. 

A  leading  commercial  agency  calls  attention  to  the  fact 
that  in  1917,  13,698  out  of  the  14,139  failures,  or  96.9 
per  cent,  had  "very  moderate,"  or  "no  credit"  ratings. 
This  left  only  3.1  per  cent  for  those  who  had  good  credit 
ratings.  The  smallness  of  the  figure  indicates  reasonable 
accuracy  of  judgment  in  assigning  credit  ratings  to  more 
than  two  million  firms  in  business. 

• 
Effect  of  Rising  or  Falling  Prices 

The  readjustment  of  business  conditions  following 
the  World  War  was  attended  by  such  sharp  and  violent 
contrasts  in  prices,  demand,  and  production  as  the  present 
generation  is  not  likely  to  experience  again,  and  it  is  to 


WHY  MEN  FAIL  IN  BUSINESS  109 

be  hoped  that  a  similar  situation  will  never  recur.  The 
student  of  credits  will  find  it  instructive  in  considering 
causes  of  failures,  to  compare  the  experiences  of  a  rising 
market,  such  as  prevailed  in  1919,  with  the  experiences 
attending  a  violently  falling  market  which  developed  in 
1921.  This  comparison  may  be  grasped  more  completely 
if  stated  in  tabulated  form.  The  statistics  for  the  two 
years  mentioned  are  here  given  for  the  United  States  and 
Canada : 

RISING  MARKET    FALLING  MARKET 
1919  1921 

Total  number  of  failures 6,141  (100%)       22,409(100%) 

Total    with    $5,000    capital    or 

less  5,740  (93-5%)       19,730  (88.1%) 

Total     with     capital     of     over 

$5,000    401(6.5%)        2,670(11.9%) 

Total    with    moderate    or    no 

credit    rating 5,995  (97.6% )       20,793  (92.8%  ) 

Total    with   good   credit    rating 

or  higher 146  (  2.4%)         1,616  (  7.2%) 

It  will  be  noticed  that  while  the  year  1921  shows  an 
increase  of  more  than  16,200  failures,  the  relative  propor- 
tions throughout  the  tabulation  for  these  two  years  are 
rather  closely  maintained,  except  in  the  second  and  the 
last  classifications.  Here  the  effect  of  the  great  losses 
resulting  from  shrinkage  of  inventories  begins  to  become 
apparent.  A  detailed  study  of  the  causes  of  failures  for 
the  two  years  of  1919  and  1920  will  present  a  very  in- 
structive comparison  for  the  student  and  the  credit  man. 


CHAPTER  X 

COLLECTING  THE  ACCOUNTS 

The  Collector 

Every  credit  is  extended  on  the  belief  that  the  account 
will  be  paid  either  at  the  cash  discount  date  or  at  ma- 
turity. If  paid  in  this  way  it  was  a  safe  credit.  If  not 
paid  when  due,  it  at  once  becomes  a  past-due  account, 
to  be  collected.  Then  it  requires  the  aid  of  the  collector 
to  demonstrate  whether  the  account  was  a  safe  credit 
risk. 

It  is  always  preferable  for  the  credit  man  to  handle 
the  collections,  as  is  the  case  with  the  greater  number  of 
houses.  He  is  more  familiar  with  the  accounts  through 
having  checked  the  credits  in  the  beginning.  If  the  col- 
lecting is  handled  by  a  separate  department,  it  is  impor- 
tant that  the  two  departments  work  in  complete  harmony 
and  close  co-operation.  Under  either  plan  the  matter  of 
first  importance  is  to  have  such  a  system  of  watching  the 
maturities  of  the  accounts  that  the  debtor's  attention  will 
be  called  to  it  as  soon  as  due.  An  underlying  principle 
is  that  the  best  time  for  collecting  an  account  is  when  it 
becomes  due. 

Watching  Maturities 

The  system  for  watching  maturities  must  be  adapted 
to  the  character  of  the  business,  the  number  of  accounts 
on  the  ledgers,  and  the  method  of  handling  the  account- 
ing. In  some  offices  duplicate  statements  are  made  and 

no 


COLLECTING  THE  ACCOUNTS  in 

held  in  an  alphabetical  file  for  use  in  following  up  during 
the  month.  Other  houses  list  them  in  a  blank  book,  or 
a  stenographer  lists  them  on  sheets  for  the  purpose.  Any 
method  which  involves  the  least  labor  for  the  number  of 
accounts,  and  which  will  be  most  convenient  for  the  per- 
son handling  the  collection  and  giving  the  list  daily  atten- 
tion, is  the  method  to  install. 

Some  credit  men  follow  the  plan  of  looking  through 
the  ledgers  once  or  twice  a  month.  This  takes  time  and 
may  delay  the  work  of  the  bookkeepers.  A  better  plan 
for  securing  the  co-operation  of  the  accounting  depart- 
ment is  to  provide  a  blank  on  which  the  bookkeeper  may 
make  a  memorandum  of  any  overdue  account  which  he, 
notices  while  posting.  As  these  blanks  are  filled  out  they 
are  passed  to  the  credit  man. 

Handling  the  Accounts 

As  accounts  reach  maturity  they  automatically  fall 
into  one  class.  They  are  just  past-due  accounts  and  all 
will  receive  practically  the  same  treatment,  viz.,  a  request 
for  a  remittance.  A  possible  exception  may  occasionally 
arise  where  a  new  credit  was  extended  with  some  mental 
reservation,  and  a  notation  was  made  by  the  credit  man 
at  the  time,  such  as  "Watch  this  account,"  or  "Collect 
promptly."  This  marks  that  item  for  special  and  im- 
mediate attention.  When  a  few  days  have  elapsed  the 
accounts  which  have  not  been  paid  and  on  which  no 
response  has  been  received  to  the  first  request  for  pay- 
ment, begin  to  group  themselves  for  special  attention,  and 
the  credit  man  begins  to  apply  to  each  the  question :  "Why 
has  this  account  not  been  paid?" 

In  finding  the  answer  to  this  question  the  method  of 
treatment  for  each  account  is  usually  determined.  In 
reaching  a  conclusion  at  this  point  the  credit  man  keeps 


112  MERCANTILE  CREDITS 

in  mind  that  he  is  not  only  getting  the  money  which  is 
involved,  but  holding  the  customer  for  the  house  as  well. 

If  it  is  a  new  account,  or  if  it  is  the  first  time  that 
the  customer  has  run  overdue,  the  credit  file  should  be 
carefully  gone  over  again  for  a  possible  explanation  of 
the  situation.  At  the  same  time  it  will  be  advisable  to 
call  the  attention  of  the  sales  department  to  the  item,  for 
some  desirable  information  may  come  from  that  source. 
In  the  meanwhile  the  correspondence  should  be  courte- 
ously shaped  towards  getting  the  customer's  own  expla- 
nation as  to  why  the  account  is  overdue. 

Should  the  debtor  not  reply,  and  the  sales  department 
can  suggest  no  reason  for  non-payment,  it  may  be  well  to 
revise  the  credit  file  at  once,  and  in  doing  so,  by  inquiries 
for  ledger  information,  endeavor  to  find  out  how  much 
he  is  owing  other  houses  and  how  he  is  paying  them.  If 
he  is  beginning  to  run  behind  all  along  the  line,  it  will  be 
a  signal  to  push  the  collection  more  urgently. 

Reasons  Given  for  Non-Payment 

When  this  revised  information  has  been  obtained,  and 
if  the  debtor  has  responded  to  requests  for  payment  by 
giving  excuses  and  a  promise  to  pay  later,  the  credit  man 
is  in  a  better  position  to  decide  on  the  course  to  be  fol- 
lowed. 

The  excuses  usually  offered  by  such  delinquents  are 
time-honored  and  hackneyed.  They  set  forth  that  collec- 
tions are  slow,  business  has  not  been  up  to  expectations, 
the  season  has  been  too  wet  or  too  dry,  or  some  unex- 
pected condition  has  befallen  the  debtor.  The  credit  man 
is  seeking  for  results  instead  of  reasons,  and  he  must 
weigh  correspondence  of  this  kind  judiciously.  It  may  be 
a  customer  who  is  temporarily  embarrassed  and  who  is 
worthy  of  assistance.  When  that  is  the  situation,  the  aid 


COLLECTING  THE  ACCOUNTS  113 

is  given  cheerfully  and  the  customer  made  to  feel  that  the 
house  is  glad  to  give  him  the  needed  extension;  but  a 
definite  date  for  payment  should  be  named.  All  such 
cases  will  represent  varying  conditions,  and  each  will  re- 
quire special  attention. 

In  case  such  a  customer  has  not  been  giving  financial 
statements,  it  may  be  an  opportune  time  for  requesting 
a  signed  statement  direct.  When  seeking  an  extension 
he  should  be  willing  to  make  full  showing  of  his  financial 
condition. 

Advantages  of  Note  Settlement  on  Overdue  Accounts 
It  may  also  be  best  to  ask  such  a  customer  to  give  an 
interest-bearing  note.  Inasmuch  as  it  has  been  decided 
to  extend  the  account  in  any  event  to  a  fixed  date,  the 
house  will  not  be  placed  at  any  disadvantage  by  having  it 
in  note  form.  The  debtor  will  pay  interest  on  a  note 
without  demur,  while  he  will  all  too  frequently  start  an 
argument  about  paying  interest  on  an  open  account.  Even 
if  he  agrees  to  pay  it  on  the  account,  he  is  apt  to  carry 
the  feeling  that  he  has  been  imposed  upon.  It  is  usually 
true  also  that  a  merchant  will  look  upon  a  note  as  some- 
thing that  must  be  paid  at  maturity,  while  he  does  not 
entertain  the  same  mental  attitude  towards  an  open  ac- 
count. A  note  offers  another  advantage  to  the  holder 
over  an  open  account:  It  can  be  discounted  at  the  bank 
if  the  need  arises. 

It  has  been  held  by  some  credit  men  that  asking  for 
note  settlement  may  be  resented  by  the  debtor  as  a 
reflection  on  his  credit  standing.  Seemingly  it  should 
have  the  opposite  effect.  It  shows  the  creditor  has  con- 
fidence that  he  will  not  need  to  commence  legal  proceedings 
before  maturity  of  the  note. 

A  note  presents  another  advantage.    It  is  an  evidence 


114  MERCANTILE  CREDITS 

of  admitted  indebtedness,  and  should  legal  proceedings  be 
necessary  later,  it  can  be  sued  upon  without  presenting 
technical  proof  as  to  sale  and  delivery  of  the  merchandise. 
Still  another  advantage  will  result  if  the  account  happens 
to  be  difficult  to  collect  and  runs  for  a  long  period.  An 
open  account  outlaws  in  from  three  to  six  years,  depending 
on  state  laws.  The  Statutes  of  Limitations  give  a  note 

from  six  to  ten  years,  depending  on  the  state. 
-I* 

Collection  of  an  Embarrassed  Old  Account 

In  the  process  of  collecting,  some  accounts  will  develop 
more  difficult  problems.  They  may  be  classed  as  those 
who  are  unable  or  unwilling  to  pay.  As  this  condition 
develops,  prompt  action  and  urgent  methods  will  become 
necessary. 

It  may  be  an  old  and  valued  customer  who  has  been 
coming  to  the  point  of  financial  difficulty  so  gradually  that 
it  is  now  noticed  for  the  first  time.  A  few  years  ago  a 
Chicago  credit  man  prepared  a  paper  on  the  subject, 
"When  to  Let  Go  of  an  Old  Customer."  It  struck  such 
a  responsive  chord  in  the  experience  of  the  credit  men 
generally  that  it  was  printed  and  given  a  wide  circulation. 

Such  cases  present  a  difficult  problem,  and  in  deciding 
it,  if  the  size  of  the  account  justifies  it,  a  collector  or  the 
credit  man  himself  had  better  call  for  a  personal  interview. 
This  will  determine  more  quickly  whether  the  customer 
can  be  aided  in  working  out  of  his  difficulties  or  whether 
the  time  has  come  to  make  the  collection  in  the  quickest 
way  possible.  The  visit  in  person,  by  a  special  collector 
or  by  the  credit  man,  will  apply  to  a  new  as  well  as  to  an 
old  customer  if  the  situation  presents  a  problem  for  im- 
mediate and  accurate  decision.  Another  advantage  may 
result  from  the  visit  in  person.  The  man  on  the  ground 
may  get  security  for  an  extension. 


COLLECTING  THE  ACCOUNTS  115 

Requisites  of  a  Good  Collector 

A  credit  man  for  a  large  house,  upon  meeting  another 
credit  man,  said:  "Tell  me  of  some  publications  on  col- 
lection methods  which  will  give  me  some  new  ideas,  or 
some  suggestions  that  I  have  not  already  discovered  by 
experience.  I  have  read  everything  I  know  of,  but  I  do 
not  find  what  I  want."  The  other  man  admitted  that  he 
did  not  know  of  any  work  on  the  subject  which  would 
meet  the  requirement. 

The  fact  remains  that  a  good  collector  must  be  self- 
developed,  and  this  equipment  will  require  diplomacy, 
courtesy,  resourcefulness,  initiative,  aggressiveness,  per- 
sistency, and  a  careful  study  of  the  legal  remedies  which 
may  have  to  be  invoked.  He  must  keep  in  mind  the 
importance  of  his  part  of  the  work.  Prompt  collecting 
keeps  working  capital  of  his  house  intact,  and  every 
account  collected  is  removed  at  once  from  the  possibility 
of  a  loss.  His  slogan  therefore  will  be :  "Get  the  money." 

Use  of  Form  Letters 

In  carrying  out  his  program  by  correspondence  he 
will  sometimes  encounter  the  plan  of  using  "form  letters." 
Several  writers  have  offered  this  plan  as  a  guide  to  suc- 
cessful collection  correspondence  and  they  submit  a  series 
of  such  letters  leading  up  gradually  to  a  climax. 

The  student  who  considers  this  method  will  soon 
notice  one  or  two  points  of  inherent  weakness  in  the  plan. 
Too  much  time  is  lost  in  using  a  series  of  eight  or  ten 
letters  written  at  intervals  of  five  to  eight  days.  A  form 
letter  is  mechanical  and  lacks  adaptability  to  special  cases. 
Another  inherent  weakness  is  that  the  debtor  discovers  the 
form  letter  earmarks  and  the  letters  therefore  do  not 
"reach"  him. 


Ii6  MERCANTILE  CREDITS 

The  oft-repeated  incident  of  the  debtor  who  was  made 
the  target  of  such  a  series  of  letters,  who  waited  till  the 
last  one  was  written,  and  who  then  remitted  with  the 
explanation  that  he  would  have  paid  the  account  much 
sooner  but  for  the  fact  that  he  had  discovered  the  "con- 
tinued story"  tone  of  the  letters  and  he  wanted  to  be  sure 
of  having  the  entire  series  before  he  paid  up,  illustrates 
the  point  in  this  criticism. 

Use  of  Draft 

The  first  one  or  two  letters  sent  to  a  delinquent 
debtor  will  have  more  or  less  similarity,  but  after  that  the 
individual  method  of  treatment  should  develop  rapidly. 
The  third  request  for  payment  may  be  a  notice  that  draft 
will  be  made  through  the  debtor's  bank.  Or  if  the 
situation  indicates  that  other  creditors  are  pushing  their 
claims,  it  may  be  a  notice  that  if  not  paid  at  once  the 
account  will  go  to  an  attorney.  This  notice  may  take  the 
form  of  a  draft  which  is  to  be  handed  to  an  attorney  by 
the  bank  if  not  paid  within  five  days.  Such  drafts  are 
furnished  by  the  publishers  of  lists  of  attorneys,  and  they 
are  very  frequently  paid  to  the  bank  within  five  days. 

When  the  proposition  to  place  with  an  attorney  has 
been  made  to  the  debtor,  it  should  in  all  cases  be  carried 
out  on  the  date  named.  In  placing  an  account  for  col- 
lection in  this  way,  the  credit  man  will  realize  that  too 
much  delay  will  sometimes  jeopardize  the  collection.  But 
he  must  also  consider  the  fact  that  if  the  account  is  large 
enough  to  require  a  court  of  full  jurisdiction,  suit  cannot 
be  commenced  until  the  next  term  of  such  a  court.  When 
that  condition  exists  there  is  an  opportunity  to  continue 
other  methods  until  time  for  filing  suit  arrives.  Every 
credit  office  should  be  supplied  with  means  of  obtaining 
information  as  to  terms  of  court  in  various  jurisdictions. 


COLLECTING  THE  ACCOUNTS  117 

Selecting  Medium  of  Collection 

There  will  always  be  a  time  with  every  house  when 
a  decision  will  be  made  as  to  whether  accounts  shall  be 
placed  with  local  attorneys  direct,  using  for  that  purpose 
the  bonded  list  of  attorneys  who  have  been  furnishing 
credit  information,  or  whether  some  forwarding  collection 
agency  shall  be  used. 

Both  plans  have  zealous  advocates.  Those  who  favor 
sending  to  local  attorneys  direct  argue  that:  (i)  corre- 
spondence with  the  local  attorney  on  the  ground  keeps  the 
credit  man  constantly  posted  as  to  developments  and 
enables  him  to  offer  suggestions  from  time  to  time,  which 
may  expedite  a  settlement;  (2)  the  local  attorney  gets  the 
entire  collection  fee,  and  will  be  more  active  in  pushing 
for  settlement  than  if  he  had  to  give  one-third  of  it  to  the 
forwarding  agency. 

The  advocates  of  the  other  plan  contend  that :  ( i )  the 
credit  man  is  relieved  from  some  labor  in  following  up 
the  collection  with  requests  for  reports  from  time  to  time 
when  the  account  is  placed  with  a  forwarding  agency; 
(2)  the  local  attorney,  hoping  to  get  additional  business 
from  the  forwarding  agency  if  he  shows  results,  will  be 
more  zealous  in  pushing  the  collection. 

Many  credit  men  will  try  out  both  plans  and  adhere 
to  the  one  which  seems  to  give  the  better  results.  He 
will  discover  that  both  plans  require  some  follow-up  work 
on  his  part,  and  he  may  be  better  satisfied  if  he  gives 
business  to  the  attorneys  who  have  given  him  credit  re- 
ports on  customers  for  the  credit  file. 

Unresponsive  Debtors 

One  of  the  perplexing  cases  which  will  develop  in  a 
collection  correspondence  with  more  or  less  frequency  is 
that  of  the  debtor  who  will  not  answer  letters.  The  in- 


n8  MERCANTILE  CREDITS 

genuity  of  the  collector  is  then  put  to  the  test.  One  of 
the  plans  most  frequently  used  perhaps  is  to  telegraph 
him,  asking  immediate  remittance  for  his  past-due  account 
and  requesting  reply  by  wire.  A  telegram  carries  a  more 
urgent  message  than  an  appeal  by  mail  and  will  nearly 
always  result  in  getting  some  form  of  response. 

A  few  years  ago  the  national  office  of  the  Association 
of  Credit  Men  published  an  illustration  of  what  is  in- 
volved with  a  debtor  of  this  class,  as  follows : 

A  CREDIT  PROBLEM. — When  the  credit  man  checks  gilt-edged 
buyers  and  receives  payment  on  a  discount  basis,  or  promptly  at 
maturity,  his  work  is  easy  and  requires  no  special  skill,  but  when 
a  risk  gets  into  a  dangerous  situation,  and  it  is  a  question  of  extri- 
cating one's  self,  then  the  test  of  skill  and  efficiency  is  brought 
into  play. 

A  case  in  point  was  cited  wherein  merchandise  is  bought  on 
6o-day  terms,  amounting  to  $300.  At  maturity  a  statement  is 
sent,  but  no  reply  is  forthcoming.  In  ten  days  a  second  statement, 
with  a  polite  request  for  remittance,  is  mailed,  but  brings  no  reply. 
In  twenty  days  a  draft  is  drawn,  which  is  returned  unpaid,  without 
explanation.  A  strong  request  for  explanation  and  remittance 
follows,  with  no  better  result,  so  that  at  the  expiration  of  forty 
days  the  credit  department  is  confronted  with  the  question,  "What 
shall  be  done  with  this  account?" 

Individuality  of  Appeals 

The  unresponsive  debtor  has  evidently  always  been  a 
great  trouble  to  the  credit  man.  Many  years  ago  there 
was  published  in  the  Bulletin  of  the  National  Association 
of  Credit  Men  an  incident  showing  how  one  credit  man 
stumbled  onto  an  idea  which  worked  well  in  one  case  at 
least.  He  had  a  debtor  named  William  Rose,  who  re- 
sisted all  efforts  to  get  a  response  to  letters,  and  maintained 
a  masterly  silence.  One  day  when  this  case  came  up 
again  in  the  file,  an  inspiration  came  to  the  credit  man 
and  in  a  kind  of  desperation  he  wrote: 


COLLECTING  THE  ACCOUNTS  119 

Oh,  William  Rose,  nobody  knows 
How  much  we  long  to  hear  from  you; 

So  William  Rose,  dig  in  your  clothes, 
And  send  us  quick  the  amount  that's  due. 

Whether  the  astonished  William  was  jolted  out  of  his 
rut  by  this  effusion,  or  whether  he  dreaded  the  recurrence 
of  such  a  poetical  attack  was  not  made  clear,  but  according 
to  the  narrative  he  remitted  by  return  mail. 

The  incident,  however,  carries  a  psychological  appli- 
cation. In  collection  correspondence  better  results  will 
be  obtained  when  the  credit  man  can  break  away  from 
the  stereotyped  and  conventional  form  of  letter  which  has 
lost  its  compelling  force.  It  has  become  threadbare 
through  continued  use  and  its  tone  very  familiar  to  the 
debtor.  Put  originality  and  individuality  into  the  appeals 
and  the  debtor  will  respond  because  mental  processes  are 
turned  into  a  new  channel.  The  credit  man  should  put 
into  his  letters  a  tone  of  confidence  and  belief  that  the 
debtor  is  going  to  pay,  and  pay  now;  the  matter  is  so 
important  and  urgent  that  there  is  no  other  way  out  of  it. 
He  may  develop  this  thought  until  his  letters  will  carry 
an  incentive  that  is  almost  hypnotic. 

Defects  in  Remittances 

In  the  handling  of  collections  a  credit  man  will  often 
find  in  the  mail  a  check  from  a  slow  customer,  which  is 
unsigned.  If  he  sends  it  back  for  signature  delay  may 
ensue.  He  may  prefer  to  draw  a  sight  draft,  attach  the 
check  to  it,  and  send  to  the  customer's  bank  for  collection. 
Or  he  may  deposit  it  in  his  own  bank  with  an  arrange- 
ment to  obtain  the  maker's  signature  when  it  reaches  the 
bank  on  which  it  is  drawn. 

A  check  may  be  received  reading  one  amount  in  the 
body  of  the  check  and  a  different  amount  in  figures.  If 


120  MERCANTILE  CREDITS 

one  of  these  is  the  correct  amount  and  the  sum  which  the 
debtor  intended  to  pay,  the  credit  man  will  put  an  indorse- 
ment on  the  check  guaranteeing  it  to  be  for  that  amount 
and  deposit  it. 

A  check  will  come  back  unpaid  marked  "Not  suffi- 
cient funds."  The  credit  man  requests  his  bank  to  put 
this  check  through  again,  and  if  its  return  was  merely 
from  oversight  it  will  usually  be  paid  on  second  presenta- 
tion. If,  when  the  check  was  given,  the  house  parted 
with  the  possession  of  something  of  value  in  exchange  for 
the  check  and  it  later  proves  to  be  worthless,  it  comes 
under  the  operation  of  the  "bad  check  law"  now  in  force 
in  most  states,  and  the  maker  of  the  check  is  subject  to 
indictment.  These  laws  are  now  effective  in  punishing 
this  form  of  fraud. 

Where  the  maker  of  such  a  check  is  hard-pressed  for 
funds,  the  credit  man  in  some  cases  can  leave  it  for  col- 
lection with  the  bank  on  which  it  is  drawn  with  an  under- 
standing that  as  soon  as  sufficient  funds  are  deposited  to 
cover  the  check  the  bank  will  certify  it  and  forward  to 
the  holder.  Or  he  may  follow  the  plan  of  one  credit  man 
who  had  a  check  for  $100  returned,  "Not  sufficient 
funds."  On  investigation  he  found  that  the  bank  balance 
lacked  only  a  few  dollars  of  covering  the  check.  He  de- 
posited to  the  credit  of  the  maker  of  the  check  enough 
of  his  own  money  to  bring  it  up  to  the  required  amount, 
and  then  had  the  check  certified.  This  would  come  under 
the  head  of  resourcefulness  in  collecting. 

The  Personal  Visit  in  Connection  with  Collection 

The  importance  of  making  a  personal  visit  was  real- 
ized by  the  action  of  one  credit  man  in  a  western  city. 
A  merchant  in  a  town  in  an  adjoining  state  notified  all 
his  customers  that  he  was  financially  embarrassed,  that 


COLLECTING  THE  ACCOUNTS  121 

in  endeavoring  to  get  through  his  difficulties  he  had  been 
forced  to  put  a  chattel  mortgage  on  his  stock.  The  holder 
of  the  mortgage  had  foreclosed,  and  the  foreclosure  sale 
was  then  being  advertised.  This  credit  man  secured 
authority  from  other  creditors  to  represent  them  in  start- 
ing bankruptcy  proceedings  or  in  whatever  action  might 
seem  necessary,  and  took  the  train. 

On  interviewing  the  debtor  he  found  that  he  was 
actually  insolvent  and  that  the  mortgage  had  been  given 
to  a  relative  more  than  four  months  before;  and  as  the 
holder  of  the  mortgage  had  waited  till  four  months  had 
elapsed,  it  would  probably  not  be  a  preference  if  bank- 
ruptcy proceedings  were  taken. 

In  making  his  investigations  the  credit  man  found  that 
the  chattel  mortgage  had  been  recorded  in  the  office  of  the 
clerk  of  the  city  court,  which  was  a  court  of  record.  He 
found,  however,  that  the  law  of  the  state  required  that 
such  a  mortgage  had  to  be  recorded  in  the  office  of  the 
recorder  of  deeds  at  the  county  seat.  He  immediately 
went  to  the  county  seat  and  found  that  the  mortgage  had 
not  been  filed  for  record  in  that  office. 

He  returned  to  the  home  town  of  the  merchant  and 
reported  what  he  had  learned  and  asked  why  the  mortgage 
could  not  be  declared  invalid.  He  found  the  attorneys 
divided  in  opinion  as  to  whether  the  wording  of  the  law 
was  mandatory  as  to  filing  in  the  county  recorder's  office, 
or  whether  any  court  of  record  would  be  sufficient.  The 
law  had  not  yet  been  passed  upon  by  the  Supreme  Court, 
and  nobody  would  prophesy  as  to  how  that  court  would 
guess. 

The  credit  man  then  decided  to  act.  He  arranged  for 
the  necessary  bond,  took  out  a  writ  of  attachment  for  the 
amount  of  his  own  claim,  and  had  the  sheriff  levy  on 
the  merchandise  of  the  debtor  covered  by  the  chattel 


122  MERCANTILE  CREDITS 

mortgage  for  over  $20,000.  At  this  point  the  relative  who 
held  the  chattel  mortgage  came  forward  with  a  proposi- 
tion to  furnish  the  money  for  a  satisfactory  settlement 
with  the  merchandise  creditors.  After  some  negotiation 
the  amount  was  agreed  upon  and  the  proper  papers  drawn 
for  a  cash  setttlement  and  release  of  the  attachment. 

Without  this  personal  visit,  and  the  energetic  action 
taken,  as  a  result,  the  merchandise  creditors  would  have 
received  nothing. 

Another  Experience  of  a  Visiting  Collector 

One  collector  for  a  packing  house  struck  a  difficult 
situation  with  a  butcher  who  had  become  delinquent.  The 
difficulty  was  that  when  the  collector  called,  no  matter  at 
what  time  in  the  day,  the  butcher  was  always  out.  This 
collector  used  a  horse  and  buggy  in  covering  his  territory, 
and  on  one  of  his  calls,  while  hitching  his  horse  across 
the  street,  he  caught  a  view  of  the  butcher  stepping  into 
his  refrigerator.  When  he  entered  the  shop  and  inquired 
for  the  owner,  he  received  from  the  employees  the  usual 
assurance  that  the  butcher  was  out.  He  replied,  "Well, 
I  have  plenty  of  time ;  I  will  sit  down  and  wait  for  him." 
After  about  ten  minutes  the  employees  suggested  that  it 
would  be  useless  to  wait,  as  it  was  not  believed  the  pro- 
prietor would  be  back  that  day.  The  collector  said  he 
was  in  no  hurry.  The  butcher  stood  it  for  nearly  half 
an  hour ;  then  emerged  from  the  ice-box  and  a  settlement 
was  reached.  This  collector  now  claims  that  this  butcher 
was  the  original  "frozen  credit." 

Firm  Policy  in  Collections 

The  standing  of  a  house  in  the  trade  is  often  deter- 
mined in  part  by  the  policy  and  methods  of  its  collection 
department.  In  one  line  of  trade  there  is  a  house  doing  a 


COLLECTING  THE  ACCOUNTS  123 

nation-wide  business  which  has  established  such  a  repu- 
tation for  itself  that  its  customers  understand  that  its 
terms  are  to  be  strictly  adhered  to  and  all  accounts  due 
are  to  be  met  at  maturity  or  credit  will  be  withdrawn. 
The  line  of  merchandise  handled  by  this  house  is  not 
better  than  can  be  had  elsewhere,  though  its  goods  are 
always  reliable  and  its  business  methods  fair.  It  is  not 
in  a  position  to  be  arbitrary  because  of  any  monopoly, 
but  it  has  reached  its  enviable  position  through  a  process 
of  educating  its  customers  to  carry  out  their  part  of  the 
purchase  contract. 

These  same  customers,  when  dealing  with  other  houses 
in  the  same  line,  will  take  liberties  on  terms  of  payment 
and  make  other  unreasonable  demands,  but  it  is  a  matter 
of  comment  that  this  one  house  is  immune  from  such 
practices,  and  it  is  generally  admitted  that  it  holds  its 
trade  without  difficulty. 

A  credit  man  who  studies  closely  the  settlement  of 
accounts  will  frequently  observe  that  new  customers  in 
the  first  settlement  will  try  out  the  house  on  some  claim 
or  demand,  evidently  to  learn  whether  that  house  will  be 
liberal  and  easy  in  its  policy  on  settlements,  or  whether 
it  will  insist  that  all  agreements  be  fairly  observed.  Such 
cases  furnish  an  opportunity  for  educating  the  customer 
to  live  up  to  his  contract,  and  the  policy  pursued  on  the 
first  settlement  will  determine  the  attitude  of  the  debtor 
for  the  future. 

Initiative  in  Handling  Collections 

The  successful  collector  will  never  cease  to  learn.  His 
training  will  come  by  study,  by  reading,  by  interchange  of 
ideas  with  others,  but  most  largely  through  experience. 
What  is  here  set  forth  is  mainly  suggestive  and  covering 
certain  principles  that  will  apply  to  the  constantly  shifting 


124 


MERCANTILE  CREDITS 


conditions  presented  through  situations  developing  daily 
in  the  conduct  of  any  business.  No  set  rules  can  be  laid 
down  to  cover  every  problem  that  the  student  will  en- 
counter. What  has  been  here  suggested  is  designed  to 
impress  the  importance  of  giving  close  and  careful  study 
to  each  individual  case,  and  to  emphasize  the  value  and 
need  of  initiative  in  the  successful  handling  of  collections. 
"Get  the  money." 


CHAPTER  XI 

TRADE  ABUSES  OR  HUMAN  NATURE  IN 
BUSINESS 

The  Nature  of  Cash  Discount 

Incidental  to  the  collection  of  accounts  there  will  be 
many  problems  arising  in  every  line  of  business,  which 
will  come  to  the  credit  manager  for  solution,  decision,  and 
adjustment. 

The  cash  discount  privilege  originated  when  the  prac- 
tice of  long-term  credits  was  adopted.  The  merchant 
who  was  in  a  position  to  buy  for  cash  was  justified  in 
asking  some  return  for  the  use  of  his  money  and  a  dis- 
count for  cash  was  the  most  convenient  way  of  figuring 
the  allowance. 

The  amount  of  such  allowance  varies  with  different 
lines,  ranging  from  y2  of  I  per  cent  in  ten  days  or  net 
thirty  days,  to  10  per  cent  discount  for  cash  in  thirty 
days  or  net  sixty  days  to  four  months.  The  first  repre- 
sents 6  per  cent  per  annum,  or  the  average  bank  rate  of 
interest.  The  larger  discounts  may  mean  40  to  50  per 
cent  per  annum  for  the  use  of  the  money,  which  is  a 
higher  rate  of  interest  than  any  house  can  afford  to  pay, 
or  needs  to  pay.  Therefore  such  rate  of  discount  is 
merely  another  way  of  making  a  lower  price  on  goods, 
or  it  may  be  considered  as  an  extra  inducement,  to  those 
merchants  whose  credit  is  somewhat  in  question,  to  make 
a  prompt  settlement. 

If  this  bonus  for  cash  payment  is  offered  to  induce 

125 


126  MERCANTILE  CREDITS 

quicker  collections  and  to  reduce  the  risk  of  losses  from 
doubtful  accounts,  in  actual  practice  the  plan  does  not  al- 
ways accomplish  what  is  expected.  The  good  credit  risk 
concerning  which  there  is  no  question  will  always  take 
the  discount,  while  the  poorer  and  doubtful  risks  will  too 
frequently  waive  the  privilege  and  let  the  account  run  to 
full  maturity. 

Cash  Discount  Likely  to  Stay 

The  cash  discount  system  is  too  firmly  entrenched  to 
be  done  away  with.  Terms  are  usually  fixed  by  the  sales 
department,  and  they  are  adjusted  to  meet  competition 
and  trade  conditions.  A  house  in  a  line  of  merchandising 
having  7  per  cent/io  days,  or  6  per  cent/3O  days  as  the 
customary  discount,  notified  its  customers  that  cash  dis- 
counts would  be  discontinued  and  all  goods  billed  net,  the 
prices  having  been  reduced  by  the  amount  represented  in 
the  discount.  It  was  expected  that  other  houses  in  the 
same  line  would  follow  the  lead  and  adopt  the  same  plan, 
as  it  would  result  in  eliminating  cash  discount  abuses. 
They  did  not  do  so,  however,  and  after  a  few  months  this 
house  returned  to  the  cash  discount  system. 

Abuses  of  System 

The  merchant  who  stretches  the  cash  discount  terms 
and  deducts  discounts  not  earned,  often  does  so  without 
offering  excuses,  assuming  as  a  matter  of  course  that  a 
house  which  appreciates  his  trade  will  gladly  accord  him 
such  a  small  favor.  Sometimes  he  will  offer  an  explana- 
tion, and  sometimes  he  will  say  frankly  that  he  overlooked 
it,  but  in  every  case  he  expects  the  allowance  and  resents 
a  refusal  to  make  it. 

The  credit  department  therefore  is  under  a  handicap 
in  resisting  the  claim,  but  the  effort  should  always  be  con- 


HUMAN  NATURE  IN  BUSINESS  127 

scientiously  made  as  a  part  of  the  educational  process 
which  leads  merchants  to  respect  contract  terms.  A 
courteous  letter  written  to  the  customer  calling  attention 
to  the  excess  discount  taken,  expressing  the  belief  that  it 
was  done  by  oversight,  and  showing  the  amount  remain- 
ing due,  which  can  be  included  in  the  next  remittance,  is 
probably  the  most  effective  method  of  meeting  such  cases, 
and  will  often  secure  the  payment  later  on. 

This  especially  applies  to  new  customers  who  may  be 
endeavoring  to  establish  precedents.  With  old  and  de- 
sirable customers  the  discount  may  be  allowed  if  the 
amount  is  not  large.  Yet  a  courteous  letter  should  be 
written  calling  attention  to  the  error  which  is  allowed  in 
this  case,  but  with  the  understanding  that  it  shall  not  be 
considered  a  precedent.  There  is  always  the  chance  that 
in  "hewing  to  the  line,  letting  the  kicks  fall  where  they 
may,"  a  few  cents  may  be  saved  in  cash  discount  and  a 
customer  lost  who  can  only  be  replaced  at  an  expense  of 
$100  to  $200. 

There  are  merchants  who  take  discounts  to  which  they 
are  not  entitled,  in  the  belief  that  their  credit  standing  is 
possibly  in  question,  and  that  the  discount  will  be  con- 
ceded because  the  house  is  so  glad  to  see  the  money  that 
they  will  overlook  the  excessive  discount  taken.  Such  a 
claim  should  not  be  permitted. 

A  successful  credit  man,  commenting  on  the  cash  dis- 
count system,  said  that  from  experience  he  placed  debtors 
in  two  classes:  "The  one,  having  adequate  capital  and 
good  credit  standing,  used  these  factors  in  exacting  such 
close  terms  in  prices,  discounts,  and  other  demands,  that 
he  seemed  unwilling  to  let  the  creditor  eat.  The  other, 
lacking  capital  and  ability  to  discount,  keeps  the  creditor 
constantly  on  the  anxious  seat,  and  seems  unwilling  to 
let  him  sleep!' 


128  MERCANTILE  CREDITS 

While  the  matter  of  business  policy  will  always  be 
considered,  the  sanctity  of  business  contracts  should  never 
be  overlooked. 

Interest  on  Past-Due  Accounts 

When  a  house  decides  to  adopt  the  policy  of  charging 
interest  on  past-due  accounts,  the  fact  should  be  stated  on 
all  orders,  invoice,  and  statement  blanks,  so  that  all  cus- 
tomers have  full  notice  that  the  rule  will  be  enforced. 
Too  many  merchants  will  let  the  jobber  or  manufacturer 
furnish  them  with  capital  through  overdue  accounts 
carried  without  interest  if  the  credit  department  permits 
the  practice.  And  too  frequently  such  debtors  take  an 
arbitrary  position  and  will  not  even  argue  the  point, 
practically  saying:  "You  can  take  it  or  leave  it."  The 
question  is  closely  related  to  collections.  Prompt  settle- 
ments do  away  with  any  question  of  interest.  Where  the 
debtor  insists  on  his  attitude  and  cannot  be  talked  out  of 
his  unbusinesslike  policy,  or  if  he  admits  that  he  needs 
more  time,  a  proposition  to  have  him  give  an  interest- 
bearing  note  may  be  the  easiest  solution. 

Shortage  and  Damage  Claims  on  Shipments 

If  the  claim  is  made  that  goods  are  not  as  represented, 
or  that  they  have  been  damaged — if  there  is  any  question 
as  to  the  fairness  of  the  claim,  it  may  be  best  to  have  the 
merchandise  involved  returned  for  inspection  and  replace- 
ment. In  such  case,  if  the  claim  is  unjust,  the  merchant 
will  usually  drop  it  and  find  some  reason  for  not  return- 
ing the  goods.  There  may  be  claims,  especially  of  mis- 
representation, where  the  salesman  and  credit  department 
may  work  together  in  making  the  adjustment  of  the  com- 
plaints. If  damage  has  been  sustained  in  transit,  the  facts 
may  justify  a  claim  against  the  transportation  company, 


HUMAN  NATURE  IN  BUSINESS  129 

in  which  case  a  proper  basis  for  the  proof  of  claim  should 
be  reached.  Claims  for  shortage  should  always  be  care- 
fully investigated.  An  effective  method  of  guarding 
against  unfair  claims  of  this  character  is  to  enclose  with 
each  invoice  a  shipping  list  showing  what  has  been  in- 
cluded in  the  package  and  that  this  list  has  been  counted 
and  checked  by  at  least  two  persons  whose  initials  are 
signed  to  it.  This  is  notice  to  the  consignee  that  the 
shipper  of  the  merchandise  is  prepared  to  resist  an  unfair 
claim. 

Returned  Merchandise 

Returned  merchandise  in  many  lines  of  trade  is  a  very 
serious  proposition,  and  perhaps  the  worst  form  of  trade 
abuse.  In  such  lines  as  clothing  or  garments,  where  a 
change  of  style  will  make  the  goods  unsalable,  it  is  an 
evil  difficult  to  combat,  especially  when  the  goods  are 
shipped  back  without  permission.  The  shipment  may  be 
brought  from  the  depot  by  a  drayman  and  the  goods  are 
in  the  house  before  any  one  in  authority  learns  of  their 
return. 

Such  situations  are  best  handled  by  credit  and  sales 
departments  in  co-operation,  and  while  the  question  of 
trade  policy  may  be  involved,  a  firm  stand  on  the  part 
of  the  credit  department  is  necessary,  so  that  the  mer- 
chant shall  not  form  the  habit.  If  it  may  seem  advisable 
to  take  the  goods,  the  credit  for  them  should  be  on  the 
basis  of  their  value  to  the  house  at  the  time  of  the  return, 
and  a  courteous  letter  written  explaining  the  amount  of 
the  credit  to  be  allowed  and  why.  In  extreme  cases  it  may 
be  best  to  ship  the  goods  back  promptly  to  the  purchaser, 
or  perhaps  advise  him  that  no  credit  will  be  given  as  there 
is  no  valid  reason  for  the  return  of  the  goods  and  they 
are  held  subject  to  his  order  and  at  his  risk. 


I3o  MERCANTILE  CREDITS 

Order  Cancellations 

The  enforcement  of  a  contract  or  order  which  a  buyer 
determines  to  cancel  is  attended  with  so  many  difficulties 
that  the  cases  where  a  seller  resorts  to  the  courts  for  aid 
are  comparatively  rare.  In  cases  of  signed  orders  a 
stipulation  may  be  included  providing  that  in  case  of  can- 
cellation the  buyer  shall  pay  to  the  seller  20  or 
25  per  cent  of  the  purchase  price  as  liquidated  damages 
resulting  from  the  cancellation.  Such  a  clause  in  a  con- 
tract will  be  enforced  by  the  courts.  With  the  great  num- 
ber of  unsigned  orders  such  a  stipulation  is  not  practical, 
but  an  understanding  with  the  salesman  to  the  effect  that 
the  order  is  confirmed  and  is  not  subject  to  cancellation  or 
change,  will  be  as  binding  as  the  order  itself. 

Situation  in  1920 

The  question  of  cancellation  of  orders  assumed  over- 
whelming importance  in  1920,  when  the  slump  in  prices 
began  to  have  far-reaching  effect.  The  coming  change  in 
conditions  took  positive  form  by  the  end  of  the  year  1919 
after  the  jobbers  and  middlemen  had  made  their  purchases 
for  the  spring  of  1920.  At  the  time  they  were  buying 
there  was  still  a  shortage  of  merchandise  so  far  as  surface 
indications  showed.  Purchasers  were  still  being  urged  to 
buy  under  the  allotment  plan,  which  meant  that  they 
should  specify  a  larger  amount  than  they  really  needed, 
because  they  otherwise  ran  the  risk  of  being  without  stock 
to  meet  the  requirements  of  the  spring  season  of  1920. 
As  that  season  opened  the  retail  merchants  began  to  sense 
the  impending  decline.  Many  of  them  had  already  placed 
their  spring  orders  in  sufficient  volume  to  meet  the  ex- 
pected demand.  They  now  began  to  cancel  orders  in 
whole  or  in  part,  and  others  withheld  their  orders.  Job- 
bers and  middlemen,  seeing  the  coming  danger,  began 


HUMAN  NATURE  IN  BUSINESS  131 

to  cancel  with  the  mills  and  manufacturers.  These  firms, 
having  obtained  advance  information,  had  been  shipping 
as  rapidly  as  possible  the  full  specifications  on  spring 
orders,  the  policy  being  to  pass  the  impending  loss  on  to 
someone  else. 

As  the  cancellations  began  to  come  in  more  rapidly, 
manufacturers  began  to  urge  the  sanctity  of  contracts  and 
to  invoke  a  standard  of  business  ethics  which  would  com- 
pel the  buyer  to  carry  out  his  agreements  and  receive 
all  merchandise  shipped  whether  he  would  be  able  to  pay 
for  the  goods  or  not.  Jobbers  and  middlemen  were  thus 
caught  between  the  upper  and  nether  millstone.  Manu- 
facturers were  demanding  that  buyers  take  their  mer- 
chandise regardless  of  consequence,  while  the  retail  deal- 
ers were  canceling  their  orders  and  returning  merchandise 
which  had  already  been  shipped. 

The  rules  of  safe  credit-granting  seemingly  were 
thrown  to  the  winds.  No  one  gave  the  order,  "Save 
himself  who  can,"  but  all  acted  on  that  principle.  The 
result  was  a  "debacle,"  but  the  situation  was  only  such  as 
always  accompanies  a  sudden  decline  in  prices. 

Merchants  Warned 

Bankers  and  writers  on  economic  subjects  had  warned 
business  men  that  this  readjustment  must  come  and  that 
the  first  symptom  of  its  approach  would  be  when  con- 
sumers began  to  curtail  purchases.  This  was  the  correct 
view.  The  government  at  that  time  held  immense  quan- 
tities of  merchandise  bought  for  war  purposes.  The  au- 
thorities adopted  the  policy  of  holding  this  stock  off  the 
market,  or  selling  it  so  gradually  that  conditions  would 
not  be  unduly  disturbed. 

Notwithstanding  these  cumulative  indications,  too 
many  merchants  had  either  been  heedless,  or  had  not  used 


I32  .     MERCANTILE  CREDITS 

conservative  judgment,  in  forecasting  the  future.  Those 
who  did  not  succeed  in  canceling  purchases,  or  who  at- 
tempted to  carry  out  their  contracts,  sustained  great 
losses.  Many  were  forced  into  bankruptcy,  as  indicated 
by  the  great  number  of  failures  in  1921.  Others  at- 
tempted to  get  through  under  the  burden  by  obtaining  long 
extensions  from  their  creditors  and  from  banks.  Such 
came  under  the  head  of  "frozen  credits,"  a  new  classifica- 
tion, devised  to  define  more  aptly  these  widespread  con- 
ditions in  business. 

While  credit  departments  were  not  responsible  for  the 
overbuying  policies  of  business  houses  in  this  period,  ex- 
cept in  so  far  as  they  failed  to  closely  diagnose  the  symp- 
toms of  the  coming  contraction  and  to  sound  a  note  of 
warning,  some  of  them  were  responsible  for  the  over- 
buying, for  every  order  placed  passed  under  the  scrutiny 
of  some  credit  man. 

The  situation  indicated  by  the  term  "frozen  credits" 
was  freely  discussed  by  all  writers  on  financial  and  busi- 
ness conditions  during  the  readjustment  period  of  1920 
and  1921,  and  it  was  asserted  by  some  that  every  "frozen" 
credit  was  a  bad  credit  when  it  was  granted.  This  claim 
is  probably  too  sweeping.  All  houses,  the  strong  and  the 
weak  alike,  were  involved  in  the  congestion  that  resulted. 
It  is  fair  criticism,  however,  to  say  that  if  the  principles 
of  sound  credit-granting  had  been  more  closely  followed 
by  all,  and  proper  importance  had  been  attached  to  warn- 
ings and  predictions  that  were  being  made  and  to  the 
influences  which  were  beginning  to  operate,  very  many  of 
these  orders  would  not  have  been  accepted. 

Handling  of  Trade  Abuses 

In  the  handling  by  correspondence  of  questions  grow- 
ing out  of  trade  abuses,  the  policy  and  standing  of  the 


HUMAN  NATURE  IN  BUSINESS  133 

house  are  to  DC  considered  and  every  letter  requires  care- 
ful consideration.  The  character  or  peculiarities  of  the 
customer  and  all  the  facts  in  the  case  should  be  gone  over 
carefully,  and  every  statement  carefully  tested  for  ac- 
curacy. 

Hold  the  customer  and  his  goodwill  if  possible,  and  yet 
protect  the  firm  from  unbusinesslike  practices. 


CHAPTER  XII 

THE  BANKRUPTCY  LAW 

Previous  Bankruptcy  Legislation 

A  national  bankruptcy  law  is  authorized  by  the  Con- 
stitution in  providing  that  "Congress  shall  have  the  power 
to  enact  uniform  laws  on  the  subject  of  bankruptcy 
throughout  the  United  States."  This  legislative  power 
has  been  exercised  four  times. 

The  first  law  was  passed  in  1800.  Its  existence  was 
limited  to  a  five-year  period  by  its  own  terms.  It  was 
intended  to  relieve  those  merchants  and  ship-owners  who 
had  lost  through  the  destruction  of  the  merchant  marine 
of  the  country  by  the  enemy's  naval  power.  It  was 
modeled  somewhat  after  the  English  law,  but  after 
relieving  those  for  whose  benefit  it  was  enacted  it  was 
regarded  unfavorably  and  was  repealed  by  Congress  in 
1803. 

The  second  law  was  passed  in  1841  and  was  under- 
stood to  be  a  relief  measure  for  those  who  had  come  under 
hopeless  burdens  of  indebtedness  through  the  financial 
disaster  of  1837,  which  placed  most  of  the  people  in  the 
debtor  class.  This  law  also  was  repealed  as  soon  as  it 
was  thought  all  debtors  had  received  the  necessary  relief. 

The  third  law  was  passed  in  1867.  It  was  intended  to 
relieve  those  who  had  become  burdened  with  debts  because 
of  the  Civil  War.  This  law  was  a  more  carefully  con- 
sidered enactment  than  either  of  its  predecessors,  but  in 
securing  its  passage  much  was  conceded  to  the  States' 

134 


THE  BANKRUPTCY  LAW  135 

Rights  advocates  and  to  debtors.  Because  of  its  own 
inherent  weaknesses  dissatisfaction  was  engendered,  which 
resulted  in  its  repeal  in  1878. 

State  Insolvency  Laws 

When  there  is  no  national  bankruptcy  law  in  existence, 
the  insolvency  laws  of  the  various  states  are  in  force. 
The  state  laws  remain  in  existence  while  a  national  bank- 
ruptcy law  is  in  operation,  though  they  are  for  the  time 
suspended  by  its  provisions.  After  the  repeal  of  the 
third  national  bankruptcy  law  the  number  of  states  kept 
increasing  and  with  the  growth  of  the  nation,  interstate 
commerce  rapidly  increased  in  volume. 

It  was  the  difficulty  of  handling  credits  and  collections 
under  the  different  laws  of  the  various  states  which  set  in 
motion  a  sentiment  in  favor  of  a  permanent  national  bank- 
ruptcy law.  It  was  called  to  the  attention  of  Congress  and 
the  business  houses  of  the  country  that  all  commercial 
nations  had  permanent  statutes  on  this  subject  except 
China,  Mexico,  and  the  United  States.  Did  the  United 
States  belong  in  that  group  ? 

Fourth  Bankruptcy  Law 

This  sentiment  crystallized  into  action  and  the  fourth 
bankruptcy  law  was  enacted  in  1898.  This  was  intended 
to  be  a  permanent  statute,  and  while  the  advocates  of  the 
law  were  obliged  to  make  many  concessions,  the  law  as 
passed  is  a  practical  and  workable  measure,  well  con- 
sidered, and  with  the  amendments  which  have  been  and 
may  be  adopted,  it  should  be  retained. 

Many  bankers  were  conscientious  objectors  to  the  law 
when  adopted.  They  felt  that  a  bank  should  be  treated 
as  a  preferred  creditor,  because  it  loaned  the  money  of 
depositors.  There  were  also  many  wholesale  houses, 


136  MERCANTILE  CREDITS 

having  a  well-organized  legal  department  for  handling 
collections,  which  preferred  to  operate  under  state  laws 
allowing  preferences.  They  were  willing  to  take  their 
chances,  and  being  usually  the  first  on  the  ground  in  cases 
of  financial  embarrassment,  they  collected  their  claims  in 
full,  and  little,  if  anything,  was  left  for  other  creditors. 

Conditions  Under  State  Insolvency  Laws 

The  commerce  of  the  nation  has  undoubtedly  thrived 
and  come  to  a  sounder  basis  since  this  present  law  went 
into  effect.  The  ratio  of  failures  has  remained  uniformly 
smaller.  Credit  has  been  adjusted  to  the  operation  of 
the  law.  To  repeal  it  and  go  back  to  the  former  chaotic 
conditions,  with  the  insolvency  laws  of  48  states  brought 
back  into  activity,  would  be  a  great  shock  to  the  credit 
system  of  the  country. 

Very  few  dispensers  of  credit  now  remember  the 
difficulties  encountered  when  the  state  assignment  laws 
were  in  operation.  The  lawyers  of  Chicago  had  evolved 
from  experience  a  definition  of  insolvency  in  those  days 
as  follows:  "An  assignment  is  a  process  of  dividing  the 
estate  between  the  insolvent  and  his  attorney  according 
to  law."  Too  often  this  definition  fitted  the  facts. 

The  men  who  passed  credits  in  Texas  prior  to  1898 
have  a  vivid  recollection  of  the  insolvency  law  of  that 
state  known  as  the  "Texas  Deed  of  Trust."  It  would 
come  into  operation  again  if  the  national  bankruptcy  law 
were  repealed.  It  provides  for  the  following  order  of  dis- 
bursing the  insolvent  estate  : 

Class  A.  Pay  the  expenses  of  this  deed  of  trust. 

Class  B.  Pay  the  local  bank  or  banks. 

Class  C.  Pay  the  relatives  of  the  debtor. 

Class  D.  Pay  the  local  creditors. 

Class  E.  Pay  creditors  outside  the  state. 


THE  BANKRUPTCY  LAW  137 

It  was  a  very  exceptional  case  when  any  assets  re- 
mained after  Class  C  or  Class  D  were  paid. 

Many  other  states  have  laws  equally  unfavorable  to 
creditors  outside  the  state.  Such  laws  do  not  tend  to 
promote  or  encourage  interstate  commerce. 

Objections  Raised  Against  Bankruptcy  Law 

Since  the  present  bankruptcy  law  was  enacted,  a  bill 
providing  for  the  repeal  of  the  statute  has  been  introduced 
at  every  session  of  Congress,  and  at  most  sessions  several 
such  bills  have  been  offered.  Such  a  strong  sentiment  has 
always  developed  against  the  repeal  that  few,  if  any,  of 
these  bills  have  ever  been  pushed  to  a  vote. 

An  association  was  formed  at  one  time  having  for  its 
purpose  the  repeal  of  this  national  statute.  One  reason 
given  for  asking  its  repeal  is  that  when  enacted  it  was 
understood  to  be  a  temporary  measure,  to  be  repealed  as 
soon  as  all  debtors  had  been  relieved  of  old  judgments 
hanging  over  them,  and  is  to  be  considered  an  equivalent  of 
the  year  of  jubilee  of  the  ancient  Hebrews.  The  advocates 
of  the  law  deny  this  temporary  purpose  of  the  enactment. 
Their  contention  seems  to  be  supported  by  the  purposes 
and  provisions  of  the  law  itself.  It  would  not  be  neces- 
sary to  include  in  a  law  which  was  intended  only  to 
discharge  debtors  from  old  judgments,  an  elaborate 
enactment  comprising  70  or  more  sections.  Nor  would 
the  restrictions  as  to  preferences  within  four  months  of 
bankruptcy  (as  in  section  60)  seem  necessary  for  a 
debtor  who  had  been  out  of  business  for  many  years  and 
was  seeking  relief  from  a  judgment  entered  against  him 
ten  or  fifteen  years  previously.  The  whole  structure  of 
the  statute  indicates  the  purpose  of  a  permanent  law. 

It  is  also  objected  that  in  its  operation  the  law  does 
not  pay  sufficient  dividends.  The  advocates  of  the  law 


I38  MERCANTILE  CREDITS 

admit  that  the  statute  is  not  permitted  in  all  cases  to 
accomplish  its  true  purpose  or  to  render  the  service  of 
which  it  is  capable.  That  is  not  the  fault  of  the  law  but 
of  those  who  interfere  with  and  hamper  its  operation.  It 
is  also  shown  that  no  other  system  of  administrating 
insolvent  estates  will  make  better  returns.  Waste  is 
unavoidable  in  insolvency  and  the  state  laws  make  a  worse 
record  as  to  average  dividends  returned. 

Business  Conserved 

The  strongest  argument  in  favor  of  a  national  bank- 
ruptcy law  is  that  it  conserves  business.  A  debtor  who 
finds  himself  temporarily  embarrassed  and  needing  time 
in  which  to  "turn  himself"  can  go  frankly  to  his  creditors 
and  arrange  for  an  extension  without  any  fear  of  an 
attachment  being  sworn  out  against  him  before  morning. 
Under  state  laws  he  could  not  take  such  a  chance,  but 
would  be  obliged  to  stagger  along  under  his  burden  until 
he  met  the  inevitable.  If  he  even  whispered  his  condition 
to  one  of  his  creditors,  the  sheriff  would  be  at  his  doors 
in  a  few  hours  with  an  execution  and  the  results  of  his 
life  work  swept  away.  The  creditor  getting  the  execution 
first  probably  would  secure  payment  of  his  debt  in  full. 
Perhaps  the  others  would  get  nothing. 

Many  a  business  has  been  saved  by  the  opportunity  to 
get  an  extension  for  a  short  time.  When  the  World  War 
started  in  1914  the  cotton  market  was  closed  completely. 
This  staple  is  the  debt-paying  crop  for  the  cotton  states, 
and  the  war  came  just  at  the  time  when  the  crop  was  about 
to  come  into  the  market.  There  was  no  market;  there 
was  nothing  to  do  but  wait  The  then  governor  of  Texas 
is  reported  to  have  said :  "If  it  had  not  been  for  the 
steadying  influence  of  the  national  bankruptcy  law,  Texas 
would  have  become  a  commercial  hell." 


THE  BANKRUPTCY  LAW  139 

While  England  has  had  a  bankruptcy  law  since  the 
time  of  Henry  the  Eighth,  nearly  600  years,  it  has  been 
repeatedly  amended  to  adapt  it  to  changing  commercial 
conditions,  and  within  the  last  fifteen  years  or  so  the  com- 
plaints as  to  its  administration  were  such  that  a  commis- 
sion was  appointed  to  consider  the  objections  to  its 
operation  and  recommend  such  changes  as  would  remedy 
the  faults  complained  of.  There  was  no  demand  for  its 
repeal,  but  it  was  believed  that  amendments  could  be 
prepared  which  would  adapt  it  to  modern  commercial 
conditions.  This  commission  submitted  its  findings 
shortly  before  the  World  War  began  in  1914. 

Preferences  Prevented 

Undoubtedly  the  most  beneficent  provision  of  the  law 
is  the  prevention  of  preferences.  "Equality  is  equity" 
and  the  fact  that  all  creditors  share  alike  in  the  distribu- 
tion of  the  assets  of  an  estate  in  itself  creates  a  feeling  of 
satisfaction  and  confidence.  Litigation  is  reduced  to  a 
minimum,  and  this  fact  also  makes  for  conservation  of 
assets.  If  the  bankruptcy  cases  which  represent  the 
process  of  getting  rid  of  old  judgments  and  that  class  of 
failures  which  show  only  liabilities  with  no  assets  are 
eliminated,  then  the  average  dividends  on  current  failures 
will  show  better  returns  to  creditors  than  could  be  possible 
under  state  assignment  laws  with  the  usual  attachment 
proceedings  and  legal  contests  which  were  the  common 
experience  prior  to  1898. 

In  a  bankruptcy  proceeding  the  debtor  conveys  all  his 
assets  to  his  creditors.  The  creditors  accept  this  transfer 
or  trust,  in  effect,  when  they  file  their  claims  and  elect  the 
trustees.  They,  therefore,  become  responsible  for  the 
administration  of  the  estate.  The  criticisms  and  com- 
plaints as  to  the  administration  of  the  law  for  the  most 


140  MERCANTILE  CREDITS 

part  grow  out  of  the  failure  of  creditors  to  meet  the 
responsibility  placed  upon  them  by  the  law.  They  do  not 
see  to  it  that  the  assets  are  so  managed  and  cared  for  as  to 
get  the  best  returns  possible.  If  creditors  were  not 
remiss  in  this  respect  the  law  would  be  found  the  best 
possible  method  for  handling  estates  thus  placed  in  their 
hands. 

Handling  of  Estates  Out  of  Court  Permitted 

Another  benefit  of  the  law  not  always  recognized  is 
the  fact  that  it  makes  possible  the  handling  of  insolvent 
estates  out  of  court.  It  secures  the  co-operation  of  all 
creditors  because  no  one  can  take  advantage  of  the  others, 
and  this  concert  of  action  produces  the  best  possible 
results  when  estates  are  thus  administered  by  a  creditors* 
committee.  It  often  happens  that  an  estate  handled  in 
this  way  will  pay  out  in  full,  and  the  business  be  turned 
back  to  the  debtor  in  fairly  good  shape  and  as  a  going 
concern.  The  contrast  between  handling  a  temporarily 
embarrassed  business  in  this  way,  or  wrecking  it,  as 
usually  happened  under  a  state  assignment  law,  is  very 
great.  The  advantage  offered  should  be  more  generally 
recognized. 

A  case  in  a  western  city  emphasizes  the  possible  ad- 
vantage of  this  method  of  settlement.  A  jobbing  house 
in  meeting  the  shrinkage  of  the  readjustment  conditions 
in  1920  encountered  unavoidable  financial  embarrassment 
and  took  the  situation  up  with  its  creditors.  A  committee 
of  creditors  was  appointed  to  investigate  the  matter  fully 
and  recommend  a  plan  of  action.  An  examination  of  the 
books  of  the  concern  showed  that  it  could  undoubtedly  pay 
out  if  given  an  extension  on  its  accounts  due  the  larger 
creditors,  and  the  committee  recommended  in  its  report 
that  the  cash  on  hand  be  used  to  pay  off  the  creditors 


THE  BANKRUPTCY  LAW  141 

having  small  claims,  while  those  having  larger  accounts 
should  be  paid  in  instalments. 

This  plan  was  accepted  seemingly  by  all  creditors  and 
checks  had  been  written  for  all  the  small  items,  when  a 
firm  of  attorneys,  having  been  able  to  secure  claims  from 
three  creditors  aggregating  $500,  filed  a  petition  in  bank- 
ruptcy, thus  upsetting  the  proposed  settlement  and  wreck- 
ing the  business.  One  of  these  three  petitioning  creditors 
had  a  small  claim,  and  within  two  days  would  have  re- 
ceived a  check  for  payment  in  full.  As  it  was  he  received 
but  a  small  dividend  on  his  own  claim  in  the  bankruptcy 
administration,  while  he  subjected  the  other  creditors  to 
serious  loss  and  aided  in  preventing  the  embarrassed  firm 
from  saving  its  business. 

Attorneys  following  such  methods  should  be  the  object 
of  business  condemnation,  but  they  can  be  prevented  from 
inflicting  such  injuries  to  business  only  by  a  refusal  of 
creditors  to  place  claims  in  their  hands. 

Adjustment  Bureaus 

The  National  Association  of  Credit  Men  has  organ- 
ized and  is  maintaining  through  its  affiliated  branches 
eighty  or  more  adjustment  bureaus.  In  handling  matters 
placed  in  their  hands  they  consider  the  interest  of  creditor 
and  debtor  alike  if  there  is  no  indication  of  dishonesty 
on  the  part  of  the  debtor.  They  work  on  the  basis  of 
getting  the  largest  dividend  possible,  at  a  reduced  rate  of 
expense,  and  of  saving  the  business  or  putting  the  debtor 
on  his  feet  again  wherever  this  can  be  done.  These  bu- 
reaus are  located  in  the  more  important  trade  centers, 
and  the  best  safeguard  against  the  wrecking  of  tempo- 
rarily embarrassed  firms  by  unprincipled  attorneys  will 
be  found  in  placing  all  claims  with  these  adjustment  bu- 
reaus, thus  assuring  that  creditors  will  have  their  accounts 


142  MERCANTILE  CREDITS 

handled  to  produce  the  largest  dividends  at  a  minimum 
of  cost,  while  the  deserving  debtor  will  be  given  a  chance 
to  save  what  may  be  the  result  of  his  life  work. 

These  bureaus  are  managed  in  an  altruistic  spirit  and 
for  the  benefit  of  all  business  interests  concerned.  This 
is  illustrated  by  one  case  handled  by  the  Omaha  bureau 
during  the  adjustment  period  of  1921.  A  general  store  in 
a  Nebraska  town,  with  a  merchandise  stock  on  which  it 
stood  the  usual  depreciations,  suffered  a  serious  fire  loss. 
Its  indebtedness  was  considerable,  and  the  firm  had  been 
forced  to  ask  some  extensions,  but  was  regarded  as 
solvent.  A  settlement  was  effected  with  the  insurance 
companies.  Some  of  its  creditors  began  to  press  for  pay- 
ment in  full  out  of  the  insurance  money  and  were  paid. 
The  Omaha  creditors  placed  their  claims  with  the  adjust- 
ment bureau,  and  the  bureau  manager  went  personally  to 
see  the  firm. 

After  looking  over  the  situation,  the  manager  saw  that 
concerted  action  was  necessary.  A  relative  of  the  firm 
held  its  note  for  a  loan  of  considerable  amount  and  this 
note  was  due.  The  bureau  manager  sent  out  a  letter  to 
all  creditors,  announcing  that  following  the  adjustment 
bureau  principle  he  ceased  to  represent  the  Omaha  credi- 
tors alone  and  would  work  for  all  creditors  alike.  He 
urged  co-operation  of  all  in  an  extension  of  the  entire 
indebtedness  to  be  paid  in  monthly  instalments  until  com- 
pletely liquidated.  The  relative  holding  the  note  agreed 
that  if  this  were  done,  he  would  wait  for  his  money  until 
all  merchandise  indebtedness  was  paid.  All  creditors 
accepted  the  arrangement,  and  the  business  was  carried 
on  successfully  with  all  indebtedness  paid  in  a  reasonable 
time. 

This  was  a  constructive  piece  of  credit  management 
and  makes  a  desirable  contrast  with  the  methods  of  those 


THE  BANKRUPTCY  LAW  143 

attorneys  who  stand  ready  to  wreck  any  business  for  the 
sake  of  resulting  fees,  regardless  of  the  best  interests  of 
their  clients. 

Composition  Settlements 

The  law  also  permits  composition  settlements  under 
direction  of  the  court,  after  the  debtor  has  been  adjudi- 
cated a  bankrupt.  The  enforcement  of  such  a  settlement 
rests  entirely  in  the  discretion  of  the  judge,  and  when  he 
is  satisfied  that  the  offer  of  compromise  is  for  the  best 
interest  of  all  concerned,  he  can  approve  it,  which  makes 
it  binding  on  all  the  creditors  even  though  they  did  not 
all  regard  it  as  satisfactory.  This  proceeding  often  hastens 
the  adjustment,  reduces  expenses,  and  gives  better  returns 
to  creditors  than  they  would  receive  if  the  estate  went 
through  the  full  course  of  bankruptcy  procedure  under 
the  law  to  a  final  dividend. 

Punishing  and  Preventing  Fraud 

The  law  has  another  feature  which  is  unknown  to 
insolvency  proceedings  under  state  laws.  This  is  the 
punishment  of  bankrupts  who  attempt  fraud  upon  credi- 
tors. In  such  cases  the  bankrupt  can  be  compelled  to 
bring  books  and  papers  into  court  and  may  be  examined 
under  oath  by  the  creditors.  If  assets  are  evidently  con- 
cealed or  not  accounted  for,  an  order  of  court  for  the 
return  of  them  to  the  estate  will  issue,  and  unless  com- 
plied with  he  will  be  under  contempt  of  court,  subject  to 
fine  or  imprisonment.  This  feature  of  the  law  is  most 
beneficial  in  preventing  fraud  and  it  is  frequently  invoked 
in  discovering  concealed  assets. 

A  recent  case  in  a  western  jurisdiction  illustrates  what 
may  be  done  in  such  a  case.  A  debtor  merchant,  having 
a  capital  of  $3,000  or  $4,000,  whose  indebtedness  should 


144  MERCANTILE  CREDITS 

not  have  been  at  any  time  in  excess  of  about  $5,000,  and 
whose  paying  record  had  been  good,  discovered  that  the 
houses  from  which  he  was  buying  were  evincing  a  liberal 
policy  on  the  line  of  credit  they  extended.  He  concluded 
to  take  advantage  of  this,  and  in  the  space  of  a  few 
months  ran  his  indebtedness  up  to  over  $19,000.  He  then 
filed  a  petition  in  bankruptcy  showing  assets  of  about 
$4,000.  He  was  brought  into  court  and  he,  his  wife, 
and  certain  relatives  were  subjected  to  a  three  days'  ex- 
amination under  oath.  He  had  deeded  a  piece  of  property 
worth  about  $16,000,  mortgaged  for  $10,000,  to  a  relative 
to  repay  a  supposed  loan.  The  examination  revealed  a 
state  of  facts  which  would  bar  his  discharge  as  a  bankrupt 
and  possibly  leave  him  subject  to  indictment.  He  turned 
over  to  the  creditors  about  $5,000  in  cash,  which  he  had 
not  scheduled,  and  agreed  that  the  transfer  of  the  real 
estate  should  be  set  aside.  In  any  case  in  which  assets 
have  disappeared  in  a  similar  way,  united  action  of  the 
creditors  under  the  law  may  secure  like  results. 

Provision  for  Ancillary  Proceedings 

Another  advantage  is  the  provision  for  ancillary  pro- 
ceedings which  enables  creditors  to  reach  and  administer 
assets  of  the  estate  consisting  of  property  located  in  other 
states.  This  clause  frequently  brings  into  estates  prop- 
erty that  otherwise  would  escape  administration  for  the 
benefit  of  all  creditors. 

The  Law  and  Court  Decisions 

Every  credit  man  should  become  familiar  with  this 
law,  and  keep  a  copy  at  hand  for  continual  reference.  A 
copy  of  it  is  found  in  mercantile  agency  books.  When 
an  account  gets  into  the  bankruptcy  court  an  attorney 
.will  be  necessary  as  a  rule  for  looking  after  the  claim, 


THE  BANKRUPTCY  LAW  145 

but  if  the  credit  man  has  in  mind  all  the  provisions  of 
the  law,  he  can  better  appreciate  what  information  should 
go  to  the  attorney  out  of  the  credit  file,  when  placing  the 
account.  This  is  especially  true  of  a  signed  property 
statement,  should  there  be  one.  With  all  small  accounts 
the  claim  may  be  filed  with  the  trustee  direct,  taking  care 
to  get  his  acknowledgment  that  it  has  been  received  and 
filed. 

The  courts  have  been  construing  the  bankruptcy  law 
for  about  twenty-five  years,  as  disputed  points  have 
arisen.  These  decisions  coupled  with  the  original  law  and 
the  various  amendments  constitute  what  may  be  termed  a 
system  of  bankruptcy  law.  There  are  other  amendments 
being  suggested  from  time  to  time,  some  of  which  could 
be  adopted  with  advantage. 

Administration  of  Bankrupt  Estates 

The  dual  administration  of  temporary  receiver  and 
trustee,  which  involves  increased  expense,  is  objected  to. 
A  substitute  for  this  plan  is  proposed  through  the  ap- 
pointment of  a  commissioner  of  bankruptcy  who  shall  be 
a  salaried  officer  of  the  court  and  who  shall  take  charge 
of  every  bankruptcy  case  coming  into  the  court.  He  may 
make  the  preliminary  investigation  as  to  whether  the 
debtor  is  bankrupt  under  the  law,  and  if  so  he  performs 
the  duties  of  receiver  or  trustee  until  the  case  is  disposed 
of.  It  is  also  urged  that  a  bankrupt  shall  pay  his  own 
attorneys'  fees  instead  of  having  them  taxed  against  the 
estate. 

The  time  may  come  also  when  this  country  may  adopt 
the  French  method  of  handling  insolvencies,  which  is 
through  a  Tribunal  du  Commerce.  There  are  no  lawyers 
or  judges.  The  Tribunal  is  composed  of  merchants  and 
business  men  who  are  experienced  and  expert  in  various 


146  MERCANTILE  CREDITS 

lines  of  trade.  Their  findings  have  the  force  of  a  court 
of  record,  and  there  is  great  saving  in  fees  and  expenses. 
The  administration  is  expedited  and  creditors  receive 
larger  dividends  accordingly. 

The  movement  in  favor  of  arbitration  agreements  in 
all  contracts  at  the  present  time,  which  permit  the  adjust- 
ment of  all  contests  under  such  contracts  by  a  committee 
of  business  men,  as  a  branch  of  a  municipal  court,  to  give 
judicial  effect  to  their  decisions,  is  a  step  in  this  direction. 

The  credit  department  should  be  posted  as  to  certain 
provisions  of  the  law  which  have  a  bearing  in  all  cases. 

Debts  Having  Priority 

The  following  debts  have  priority  over  the  general 
creditors  in  bankruptcy  proceedings  : 

1.  All  taxes  due  the  United  States,  the  state,  county, 

district,  municipality,  or  any  board  having  legal 
right  to  levy  taxes. 

2.  The  necessary  costs  of  preserving  the  estate  subsequent 

to  filing  the  petition. 

3.  The  filing  fees  in  involuntary  proceedings,  and  the 

reasonable  expenses  of  recovering  transferred  and 
concealed  assets. 

4.  The  cost  of  administration  and  one  reasonable  attor- 

ney's fee  for  services  actually  rendered  to  the  peti- 
tioning creditors  in  involuntary  petitions,  and  to 
the  bankrupt  in  voluntary  cases  if  the  court  allows. 

5.  Wages  to  employees  earned  within  three  months  prior 

to  bankruptcy  proceedings,  not  exceeding  $300 
to  each  claimant. 

Acts  of  Bankruptcy 

Acts  which  throw  a  business  into  bankruptcy  are  as 
follows : 


THE  BANKRUPTCY  LAW  147 

1.  Having  concealed,   conveyed,   transferred,   removed, 

or  permitted  to  be  concealed  or  removed,  any  part 
of  his  property  while  insolvent  with  intent  to 
hinder,  delay,  or  defraud  his  creditors,  or  any  of 
them. 

2.  Having  transferred,  while  insolvent,  any  portion  of 

his  property  to  one  or  more  of  his  creditors  with 
intent  to  prefer  such  creditors  over  other  creditors. 

3.  Having  suffered  or  permitted,  while  insolvent,  any 

creditor  to  obtain  a  preference  through  legal  pro- 
ceedings, and  not  having  at  least  five  days  before  a 
sale  or  final  disposition  of  any  property  affected  by 
such  preference,  vacated  or  discharged  such  pro- 
ceeding. 

4.  Having  made  a  general  assignment  for  the  benefit  of 

his  creditors,  or,  being  insolvent,  applied  for  a 
trustee  or  receiver  for  his  property,  or  if  because  of 
insolvency  a  trustee  or  receiver  has  been  put  in 
charge  of  his  property  by  legal  authority. 

5.  Has  admitted  in  writing  his  inability  to  pay  his  debts 

and  his  willingness  to  be  adjudged  a  bankrupt  on 
that  ground. 

If  the  debtor  can  show  that  he  was  solvent  at  the  time 
any  of  the  above  acts  was  committed  the  proceedings  shall 
be  dismissed.  Involuntary  proceedings  in  bankruptcy 
cannot  be  taken  against  any  municipal,  railroad,  insurance, 
or  banking  corporation,  nor  against  any  wage-earner  or 
person  engaged  chiefly  in  farming  or  tilling  of  the  soil. 

Debts  Not  Subject  to  Bankruptcy  Law 

The  following  debts  are  not  released  by  a  discharge  in 
bankruptcy : 

1.  All  taxes  as  heretofore  listed. 

2.  All  liabilities  for  obtaining  property  by  false  pretenses 

or  representations. 


148  MERCANTILE  CREDITS 

3.  Liability  for  wilful  or  malicious  injury  to  the  person 

or  property  of  another. 

4.  Alimony  due  or  to  become  due. 

5.  Maintenance  or  support  of  wife  or  child. 

6.  Debts  not  duly  scheduled  in  time  for  proof  and  allow- 

ance with  name  of  creditor,  unless  such  creditor  had 
knowledge  of  the  proceedings  in  bankruptcy. 

7.  Debts    created   by   the   fraud,    embezzlement,    mis 

appropriation,  or  defalcation  of  the  debtor  while 
acting  as  an  officer  or  in  any  fiduciary  capacity. 

Acts  Preventing  Discharge  of  Bankrupt 

The  following  acts  will  prevent  the  discharge  of  the 
bankrupt  from  his  debts: 

1 .  If  he  has  committed  an  offense  punishable  by  imprison- 

ment under  this  law. 

2.  If,  with  intent  to  conceal  his  financial  condition,  he 

has  destroyed,  concealed,  or  failed  to  keep  books  of 
account  or  records  from  which  such  condition 
might  be  ascertained. 

3.  If  he  has  obtained  money  or  property  on  credit  by 

means  of  a  materially  false  statement  in  writing 
made  for  the  purpose  of  obtaining  such  credit. 

4.  If  at  any  time  within  four  months  he  has  removed, 

destroyed,  concealed,  or  permitted  to  be  removed, 
destroyed,  or  concealed,  any  of  his  property  with 
intent  to  hinder,  delay,  or  defraud  his  creditors. 

5.  If  he  has  been  granted  a  discharge  in  voluntary 

proceedings  within  six  years. 

6.  If,  in  the  course  of  the  bankruptcy  proceedings,  he 

has  refused  to  obey  any  lawful  order  of,  or  to  answer 
any  material  question  approved  by,  the  court. 

Suggested  Improvements  to  Law 

There  is  a  strong  sentiment  in  favor  of  doing  away 
with  the  giving  of  power  of  attorney  when  the  creditor 


THE  BANKRUPTCY  LAW  149 

resides  within  the  district  in  which  bankruptcy  proceed- 
ings have  been  brought.  The  result  of  this  ruling  would 
be  to  secure  more  interest  on  the  part  of  the  creditors 
in  their  bankruptcy  cases.  This  would  insure  better  ad- 
ministration of  the  law. 

It  should  be  made  more  difficult  for  the  bankrupt  to 
secure  a  discharge,  which  should  be  granted  only  when 
the  referee  can  find  affirmatively  from  the  proceedings 
that  there  is  no  evidence  or  presumption  of  fraud. 

The  English  law  should  be  followed  in  one  respect, 
viz.,  when  the  record  is  not  satisfactory  to  the  judge  he 
may  grant  the  discharge  tentatively  and  hold  it  in  sus- 
pense for  two  years. 

Also  the  bankrupt  should  be  required  to  show  what 
has  become  of  assets  where  there  is  an  evident  discrep- 
ancy. 

A  wholesome  reform  would  be  secured  if  a  discharge 
were  denied  unless  the  estate  paid  a  dividend  of  40  per 
cent  to  creditors. 

Under  the  present  law  all  decisions  are  made  by  the 
referee  except  the  approval  of  composition  settlements 
and  granting  the  discharge  of  the  bankrupt.  These  must 
be  decided  by  the  judge  himself. 

While  it  should  always  be  kept  in  mind  that  with  the 
beginning  of  bankruptcy  proceedings  excessive  waste  un- 
avoidably results,  the  national  bankruptcy  law  should  be 
kept  in  force.  A  more  serious  waste  would  result  under 
state  assignment  laws.  A  national  law  stabilizes  and 
strengthens  credit  and  conserves  business.  Every  credit 
man  should  oppose  its  repeal. 

Canadian  Bankruptcy  Act 

Canada  has  recently  adopted  a  Dominion  Bankruptcy 
Act  (effective  in  1920),  which  supersedes  the  various 


150  MERCANTILE  CREDITS 

province  insolvency  laws  previously  in  force.  The  Do- 
minion Act  is  taken  from  the  English  bankruptcy  system, 
with  adaptations  to  meet  the  different  business  customs 
and  conditions  prevailing  in  the  Canadian  Dominion. 
After  two  years  of  experience  it  was  found  necessary  to 
revise  this  act  in  order  to  clarify  several  of  its  provisions 
and  make  it  a  workable  statute  in  practice. 

This  law  is  superior  to  the  United  States  statute  in 
that  it  takes  cognizance  of  the  dangers  and  losses  resulting 
from  a  merchant  trading  while  insolvent.  When  he  be- 
comes unable  to  meet  his  obligations,  his  creditors  may 
at  once  take  charge  of  his  business  under  the  law  and 
take  steps  to  secure  payment  on  his  obligations,  thus  pre- 
venting the  dissipation  of  assets  which  may  occur  under 
the  administration  of  the  American  law.  The  experience 
under  the  Canadian  law  as  to  the  necessity  for  amend- 
ments is  similar  to  that  of  the  United  States,  and  as  the 
need  for  these  amendments  develops  from  time  to  time 
Congress  will  no  doubt  afford  the  necessary  relief.  Eng- 
land has  had  a  similar  experience  and  has  in  recent  years 
passed  amendments  recommended  by  a  commission  that 
spent  considerable  time  in  making  an  exhaustive  exami- 
nation of  the  defects  in  administration  developed  by  ex- 
perience and  by  changing  commercial  conditions. 


CHAPTER  XIII 
BY-PRODUCTS  IN  CREDIT-GRANTING 

Insurance 

It  will  not  infrequently  happen  that  the  credit  depart- 
ment will  be  in  charge  of  placing  the  insurance  for  the 
firm.  This  will  involve  keeping  track  of  the  amount  of 
merchandise  on  hand,  reducing  or  increasing  the  amount 
of  insurance,  and  watching  expirations. 

It  also  requires  a  careful  study  of  those  changes  in 
physical  condition  of  the  risk  which  might  affect  the 
terms  of  the  policy,  and  of  any  changes  or  improvements 
that  might  be  made  to  reduce  the  rate  of  premium. 

There  are  a  great  many  kinds  of  insurance  covering 
other  things  about  a  business  than  the  fire  hazard,  such 
as,  floater  policies  covering  goods  in  transit,  parcel  post, 
cyclone  or  tornado,  credit  insurance,  use  and  occupancy, 
burglary,  employers'  liability,  "hold  up,"  elevator,  public 
liability,  loss  of  profits,  boiler  explosions,  leases  or  rentals, 
sprinkler  leakage,  and  life  insurance  on  executive  offi- 
cers of  the  firm.  All  these  questions  involve  study  on 
the  part  of  whoever  handles  this  part  of  the  business.  If 
the  firm  uses  teams,  trucks,  and  automobiles,  the  various 
lines  of  insurance  required  for  them  is  a  complex  question. 

Advising  Customers  on  Fire  Insurance 

The  question  of  fire  and  burglary  insurance  carried 
by  customers  of  the  house  closely  affects  credits.  If  the 
credit  man  is  reasonably  well  informed  on  insurance  ques- 

151 


152  MERCANTILE  CREDITS 

tions,  he  may  often  be  able  to  give  suggestions  to  cus- 
tomers. In  many  of  the  smaller  towns  where  the  lack 
of  water  supply  and  a  well-equipped  fire  department 
makes  the  risk  extra  hazardous,  a  high  premium  rate  is 
charged  by  the  insurance  companies  and  the  merchant  is 
tempted  to  economize  on  expenses  by  allowing  the 
creditors  to  carry  a  part  or  all  of  his  fire  risk.  He  thinks 
he  is  carrying  it  himself,  but  in  case  of  a  total  loss  his 
first  thought  usually  is  to  appeal  to  his  creditors  for  a  set- 
tlement at  25  cents  on  the  dollar.  To  help  him  get  a 
lower  rate  and  show  him  that  no  matter  what  the  cost,  his 
credit  depends  on  adequate  insurance  and  the  cost  of  it  is 
an  expense  item  to  be  included  in  the  price  at  which  he 
sells  his  goods,  is  a  part  of  constructive  credit-granting. 
In  many  parts  of  the  country,  tornado  insurance  is 
desirable  and  should  be  carried.  Burglary  insurance  is 
almost  equally  essential  in  many  lines  of  business. 

Watching  Amounts  at  Risk 

In  a  period  of  fluctuating  prices  a  merchant  may  fail 
to  think  of  the  additional  insurance  necessary  and  the 
credit  man  may  have  to  call  his  attention  to  it.  During 
the  period  of  high  costs  of  material  and  labor  resulting 
from  the  World  War,  many  merchants  who  owned  their 
own  buildings  suffered  serious  losses  because  of  in- 
adequate insurance.  Many  associations  of  credit  men 
issued  warnings  to  their  customers  which  led  to  proper 
increases  in  the  insurance  carried.  Those  who  suffered 
losses  in  many  cases  realized  for  the  first  time  how  the  80 
per  cent  coinsurance  clause  worked  out  in  practice. 

Eighty  Per  Cent  Coinsurance  Clause 

The  principle  of  all  insurance  is  mutual  whether  the 
companies  work  under  that  name,  or  whether  they  are 


BY-PRODUCTS  IN  CREDIT-GRANTING  153 

known  as  "old  line  or  "board  companies.  All  premiums 
collected  go  into  a  fund  from  which  the  companies  pay 
losses.  They  are  the  agents  for  the  policy-holders  in  dis- 
tributing this  fund  to  those  who  suffer  fire  losses.  They 
charge  a  certain  percentage  for  their  services  in  collecting 
this  fund  and  making  the  distribution  to  those  who  suffer 
loss. 

In  fixing  rates  the  companies  say  frankly  they  can  and 
do  make  a  lower  rate  to  those  policy-holders  who  carry  in- 
surance to  nearly  full  value  of  the  property  at  risk,  and 
the  80  per  cent  coinsurance  clause  in  the  policies  is  based 
on  this  theory.  The  companies  illustrate  the  working  of 
this  form  of  policy  by  the  following  tables : 

d) 

VALUE  OF  PROPERTY      INSURANCE  FIRE  Loss  COMPANY  PAYS 

$10,000                    $8,000  $6,000                  $6,000 

10,000                      8,000  8,000                    8,000 

10,000                      8,000  9,000                    8,000 

In  such  cases  the  80  per  cent  clause  has  no  effect,  as  it 
was  complied  with  and  the  company  paid  the  entire  loss  up 
to  the  amount  of  the  policy.  In  the  third  item  the  assured 
stood  the  loss  of  $1,000  in  excess  of  his  policy. 

(2) 

VALUE  OF  PROPERTY      INSURANCE      FIRE  Loss      COMPANY  PAYS 
$10,000  $6,000  $8,000  $6,000 

In  this  case  also  the  80  per  cent  clause  has  no  effect. 
The  loss  was  80  per  cent,  but  the  assured  by  carrying 
less  than  that  amount  was  his  own  insurer  to  the  extent  of 
a  $2,000  loss,  and  the  company  paid  the  policy  in  full. 

(3) 

VALUE  OF  PROPERTY      INSURANCE      FIRE  Loss 
$10,000  $7,000  $5,ooo 

COMPANY  PAYS  %,  OR  $4,375 
ASSURED  PAYS  J4  OB        625 

$S,ooo 


154  MERCANTILE  CREDITS 

In  this  case,  where  both  insurance  and  loss  fall  below 
80  per  cent  of  the  value,  the  clause  comes  into  operation, 
and  the  assured  stands  his  ratio  as  outlined  in  the  clause. 
The  majority  of  those  carrying  insurance  have  to  go 
through  such  an  adjustment  fully  to  understand  the 
policy. 

In  case  of  fire  loss  an  adjustment  is  more  readily 
reached  if  all  insurance  is  concurrent — that  is,  if  all 
policies  bear  the  same  form  of  "rider." 

Fire  Losses  Too  Great  in  This  Country 

Every  credit  department  should  act  in  harmony  with 
the  Fire  Prevention  Association  in  an  educational  cam- 
paign to  prevent  fires.  Some  years  ago  the  annual  fire 
loss  of  this  country  was  figured  at  $3.15  per  capita,  which 
in  round  numbers  is  over  $300,000,000.  This  became  a 
tax  on  the  commerce  of  the  nation. 

For  the  same  year  the  fire  loss  of  Germany  figured  33 
cents  per  capita.  The  difference  results  from  the  German 
municipal  regulations  to  prevent  fires.  In  addition  to 
better  laws  for  regulating  building  methods,  it  is  pro- 
vided that  if  a  German  property-owner  has  a  fire  on  his 
premises  which  communicates  to  and  destroys  the  prop- 
erty of  a  neighbor,  that  neighbor  has  a  valid  cause  of 
action  against  him  and  can  collect  by  a  court  proceeding 
the  amount  of  loss  he  has  sustained. 

Credit  Insurance 

Credit  insurance  has  been  written  in  this  country  for 
perhaps  thirty-five  years.  One  company  writes  it  ex- 
clusively. Two  or  three  others  furnish  such  a  policy  as 
a  department  of  their  business. 

To  speak  accurately,  credit  insurance  is  an  insurance 
against  excessive  losses  from  bad  debts  in  any  one  year. 


BY-PRODUCTS  IN  CREDIT-GRANTING  155 

The  policy  stipulates  that  the  insured  must  bear  the 
average  or  known  loss  before  the  insurance  company  is 
"reached"  or  is  liable.  The  known  loss  is  ascertained  by 
taking  the  total  losses  from  bad  debts  for  the  preceding 
five  years,  dividing  by  five,  and  the  quotient  is  the  known 
loss.  The  insurance  is  based  on  the  view  that  a  loss  is 
unavoidable  each  year  in  that  line  of  trade,  and  the  pro- 
tection is  against  excess  losses  only.  The  policy  also 
stipulates  that  it  covers  only  credit  risks  that  have  a  cer- 
tain rating  in  one  of  the  commercial  agency  books.  The 
insured  elects  which  agency  shall  be  taken  for  this  pur- 
pose. The  insurance  does  not  cover  blank  or  off-rated 
risks.  These  can  be  covered  only  by  a  special  contract 
and  at  a  special  premium  rate. 

The  insurance  company  before  issuing  a  policy  or  fix- 
ing a  rate  takes  into  account  the  standing  of  the  firm  in 
the  trade,  its  policy  in  granting  credits,  the  effectiveness 
of  its  credit  department,  and  other  conditions  affecting  the 
conduct  of  the  business.  When  a  policy  is  issued,  if  at  the 
end  of  the  year  there  is  a  liability  on  the  part  of  the  insur- 
ance company,  the  loss  of  that  year  is  used  in  determining 
the  rate  of  average  or  known  loss  if  the  policy  is  renewed. 
The  form  of  the  rider  of  the  policy  will  vary  considerably 
in  adapting  it  to  the  conditions  of  various  lines  of  busi- 
ness. 

Arguments  in  Favor  of  Credit  Insurance 

The  main  arguments  used  by  those  who  solicit  this 
class  of  insurance,  are: 

i.  That  by  insuring  against  excessive  losses  a  jobber  or 
manufacturer  may  know  in  advance  just  what  his 
loss  will  be  for  the  coming  year.  This  is  supposing 
that  the  policy  covers  all  classes  of  risks  sold, 
whether  rated  or  not. 


I56  MERCANTILE  CREDITS 

2.  That  it  is  just  as  logical  and  consistent  to  carry  this 

insurance  against  bad  debt  losses  as  it  is  to  insure 
against  loss  by  fire. 

3.  That  when  the  risk  of  excessive  loss  by  bad  debts  is 

insured  against,  the  house  can  take  larger  chances  in 
passing  credits,  and  thus  do  a  larger  volume  of 
business.  This  will  make  for  larger  profits. 

4.  That  in  case  of  widespread  depression,  which  might 

result  in  a  panic,  the  carrying  of  insurance  policies 
against  excessive  losses  will  avoid  these  losses  by 
throwing  them  onto  an  insurance  company,  and 
the  danger  of  a  panic  is  averted. 

Restrictions  in  Policies 

There  are  various  restrictions  in  these  policies,  limiting 
the  amount  of  loss  assumed  on  any  individual  risk,  pro- 
viding that  the  account  on  which  a  loss  is  paid  shall  be 
turned  over  to  the  insurance  company  as  salvage,  and 
limitations  concerning  off-rated  accounts  which  enter  into 
the  settlement  in  case  the  losses  of  the  assured  go  beyond 
the  limit  fixed.  The  operation  of  these  clauses  is  better 
understood  in  each  case  after  an  adjustment  is  had.  The 
cost  of  the  insurance  premium  on  such  a  policy  should  not 
be  lost  sight  of. 

Objections 

Those  who  do  not  favor  this  class  of  insurance  object 
that  it  is  not  always  possible  to  anticipate  the  amount  of 
bad  debts  in  any  one  year,  even  when  a  policy  of  insur- 
ance is  carried,  and  especially  if  the  policy  does  not  cover 
unrated  or  off-rated  customers.  They  also  believe  that 
it  is  a  bad  policy  to  grant  credits  relying  on  an  insurance 
policy  to  make  them  good  if  they  develop  into  a  loss;  and 
that  it  militates  against  safe  methods  in  credit-granting 
if  the  credit  man  must  refer  to  the  policy  each  time  he 


BY-PRODUCTS  IN  CREDIT-GRANTING  157 

passes  on  an  oraer  from  an  off-rated  or  blank-rated  cus- 
tomer, or  if  he  is  being  induced  to  take  an  undue  risk 
because  his  house  carries  this  form  of  insurance. 

The  comparison  with  fire  insurance  does  not  carry 
much  weight  with  a  credit  man.  A  fire  may  wipe  out 
every  dollar  in  property  that  a  man  possesses,  and  in  the 
space  of  an  hour  or  so.  That  is  a  risk  too  great  to  be 
carried  alone.  It  is  not  conceivable,  however,  that  any 
jobber  or  manufacturer  can  lose  all  his  accounts  in  any 
one  year,  as  bad  debts.  If  he  loses  ^  of  I  per  cent  of 
them  it  is  usually  in  excess  of  normal,  and  would  be  as 
much  as  an  insurance  company  would  give  a  policy  to 
cover.  As  to  averting  or  preventing  panics,  it  is  plain 
that  if  there  were  a  very  large  volume  of  this  class  of 
insurance  outstanding,  and  a  widespread  depression  of 
business  occurred,  the  underwriting  capital  of  the  com- 
panies issuing  such  policies  would  be  almost  immediately 
used  up. 

The  above  considerations  no  doubt  explain  why  so 
few  companies  are  engaged  in  this  line  of  insurance,  and 
also  why  so  few  houses,  compared  with  the  total  number 
in  business,  carry  this  form  of  insurance.  The  general 
sentiment  seems  to  be  that  the  best  kind  of  insurance 
against  excess  losses,  is  a  capable  credit  man  who  can 
forecast  the  conditions  which  might  produce  business  de- 
pression, and  whose  constant  aim  is  to  raise  the  standard 
of  credit,  thereby  reducing  bad  debt  losses  to  a  minimum. 

Bulk  Sales  Law 

A  bulk  sales  law  is  now  in  force  in  all  the  states. 
When  it  was  first  enacted  in  Minnesota  it  was  regarded 
as  probably  unconstitutional,  being  seemingly  an  inter- 
ference with  the  right  to  contract,  and  was  considered 
open  to  objection  as  class  legislation.  The  supreme  court 


I58  MERCANTILE  CREDITS 

of  the  state  upheld  it,  however,  as  being  properly  within 
the  police  powers  of  the  state,  and  it  was  rapidly  adopted 
in  other  states.  It  puts  a  check  upon  the  operations  of 
the  "fly-by-nights,"  who  prey  upon  business  by  obtaining 
credit,  closing  out  the  merchandise  for  cash,  and  disap- 
pearing. 

The  bulk  sales  law  is  not  a  means  of  collecting  debts 
in  itself.  It  secures  a  notice  for  the  creditor  of  any  in- 
tended sale  of  a  stock  of  chattels  in  bulk  or  outside  of  the 
usual  course  of  business.  This  notice  varies  somewhat  in 
different  states,  but  the  creditor  having  such  notice  has 
time  to  act  in  protection  of  his  interest.  If  the  buyer  and 
seller  are  honest  in  the  transaction  and  all  debts  are  paid, 
the  law  has  no  bearing  on  the  sale.  A  failure  to  give  the 
required  notice,  makes  the  stock  of  goods  subject  to  the 
claims  of  creditors  according  to  the  wording  of  the  law 
of  the  state  in  which  the  sale  occurs,  and  the  burden  of 
proof  is  placed  upon  the  buyer  and  seller  to  show  that 
the  transaction  is  free  from  fraudulent  intent. 

The  properly  equipped  credit  department  should  have 
a  summary  of  this  law  for  all  the  states.  The  procedure 
in  other  states  would  seem  to  be:  Wire  claim  to  an  at- 
torney on  receipt  of  the  notice,  with  instructions  to  in- 
vestigate the  proposed  sale  and  report  whether  rights  of 
creditors  are  safeguarded ;  otherwise  take  action  as  he  may 
suggest.  A  pamphlet  has  been  published  by  the  National 
Association  giving  excellent  suggestions  as  to  the  opera- 
tion of  various  bulk  sales  laws.  Every  credit  student 
should  obtain  a  copy  of  this  publication. 

Conditional  Sales  Contracts 

The  conditional  sales  contract,  taken  from  the  Law 
Merchant,  permits  the  buyer  to  take  possession  of  the 
goods  but  reserves  the  title  in  the  seller  until  the  purchase 


BY-PRODUCTS  IN  CREDIT-GRANTING  159 

price  is  paid  in  cash.  The  states  generally  have  recog- 
nized the  validity  of  this  method  of  sale.  Certain  states 
have  enacted  statutes  requiring  such  contracts  to  be  filed 
or  recorded  to  protect  the  right  of  the  seller.  It  is  gen- 
erally recognized  that  the  buyer  can  pass  title  to  innocent 
purchasers,  since  he  has  the  right  to  do  this  under  the 
contract.  In  such  case  the  seller  has  a  claim  on  the  pro- 
ceeds of  the  sale  where  it  can  be  identified,  as  in  the  case 
of  a  note. 

In  cases  of  insolvency  the  seller  used  to  be  able  to 
apply  to  court  for  an  order  requiring  the  assignee  to  turn 
back  to  him  any  merchandise  on  hand  which  had  been 
bought  under  such  a  contract.  The  theory  was  that  the 
assignee  stepped  into  the  place  of  the  original  buyer  and 
took  his  rights  under  such  contract. 

This  construction  of  the  contract  was  followed  by  the 
courts  under  the  national  bankruptcy  law  until  the  amend- 
ment of  1910,  which  provided  that  the  trustee  took  the 
place  of  the  creditors  with  all  the  rights  of  a  judgment 
creditor  in  possession.  This  nullified  the  conditional  sales 
contract  after  bankruptcy  proceedings,  but  the  courts  still 
hold  it  good  as  between  seller  and  buyer  prior  to  bank- 
ruptcy. The  seller  can  at  any  time  repossess  himself  of 
the  merchandise  or  chattels  on  hand  under  the  contract 
either  by  agreement  with  the  buyer  or  by  order  of  court. 
This  form  of  contract  is  used  to  advantage  by  many 
houses  and  could  be  so  used  by  many  others. 

Uniform  Sales  Laws 

A  uniform  sales  law  is  being  quite  rapidly  adopted 
by  the  states.  It,  in  fact,  embodies  the  Law  Merchant 
so  far  as  it  is  adaptable,  and  includes  "Statutes  of 
Frauds."  It  should  be  studied  by  credit  departments,  as 
it  will  become  the  basis  of  laws  governing  sales  when  all 


160  MERCANTILE  CREDITS 

the  states  have  adopted  it.    A  copy  of  this  law  should  be 
in  every  credit  department  for  reference. 

The  Negotiable  Instruments  Law 

The  negotiable  instruments  law  is  now  in  force  in 
every  state,  with  possibly  one  exception.  It  results  in 
uniformity  on  this  subject,  and  it  should  be  at  hand  for 
reference  in  every  credit  office.  It  is  printed  in  at  least 
one  of  the  commercial  agency  books. 

Foreign  Corporation  Laws 

Just  before  and  immediately  after  the  Civil  War  the 
corporation  form  of  doing  business  received  a  great  im- 
petus. As  they  increased  in  numbers  and  began  to  do 
business  throughout  the  country,  the  question  of  the  right 
of  these  corporations  to  do  business  in  other  states,  and 
especially  to  use  the  court  processes  of  other  states  in  col- 
lecting debts  from  the  citizens  of  that  state,  began  to  be 
raised.  States  began  to  legislate  against  foreign  corpora- 
tions in  a  very  drastic  way,  denying  them  the  privilege  of 
the  court  processes  unless  they  filed  copies  of  their  charter 
in  such  state  and  in  other  ways  made  themselves  subject 
to  the  taxing  powers  of  the  foreign  states  in  which  they 
sought  to  do  business. 

Wherever  such  legislation  has  been  reviewed  by  the 
United  States  Supreme  Court  such  enactments  have  been 
held  unconstitutional  as  violating  the  clause  of  the  Con- 
stitution giving  Congress  the  power  to  regulate  commerce 
between  the  states.  It  is  difficult  fur  the  individual  state 
to  interfere  with  interstate  commerce.  These  foreign 
corporation  laws  still  stand,  however,  and  the  credit  de- 
partment must  deal  with  them.  Many  manufacturing 
corporations  which  maintain  selling  branches  in  other 
states  have  credits  passed  upon  and  all  orders  accepted  at 


BY-PRODUCTS  IN  CREDIT-GRANTING  161 

the  home  office,  which  makes  the  ousiness  safely  interstate 
commerce.  It  is  a  proposition  requiring  the  study  of  the 
credit  department. 

Relative  Advantage  of  Branches 

The  character  of  the  business,  the  terms  and  condi- 
tions under  which  sales  are  made,  will  usually  be  strong 
determining  factors.  If  orders  are  taken  in  advance  for 
goods  to  be  manufactured  according  to  specifications  and 
shipped  in  one  consignment  from  factory  or  mill  when 
completed,  thus  supplying  the  requirements  of  the  buyer 
in  great  part  for  the  season,  it  will  be  more  advantageous 
to  pass  the  credit  and  accept  the  order  at  the  home  office. 
But  if  such  branch  houses  are  established  as  distributing 
points  for  staple  goods  in  that  territory,  many  advantages 
will  result  from  passing  the  credits  at  the  branches. 

Carrying  a  stock  of  goods  at  branches  which  come  in 
carload  lots  from  the  factory  effects  a  great  saving  in 
carrying  charges,  and  the  promptness  with  which  small 
orders  can  be  filled  will  be  such  a  convenience  to  the  cus- 
tomers of  the  house  that  a  substantial  increase  in  volume 
of  business  usually  results.  The  credit  man  at  the  branch 
house  will  be  better  informed  as  to  local  conditions  affect- 
ing credits,  can  maintain  a  closer  acquaintance,  can  come 
in  touch  with  a  larger  number  of  the  customers,  and  can 
handle  collections  more  successfully.  These  advantages 
of  a  branch  house  so  conducted  have  led  many  firms  to 
incorporate  these  branches,  notably  in  the  state  of  Texas, 
thereby  obtaining  the  advantages  of  a  domestic  corpora- 
tion and  avoiding  the  drastic  requirements  of  foreign 
corporation  laws. 

The  detail  connected  with  many  of  these  questions  will 
be  referred  to  the  attorney  of  the  firm  as  they  come  up 
for  decision,  because  of  varying  facts  and  conditions. 


CHAPTER  XIV 

BANKING  CREDITS 

A  Knowledge  of  Bank  Credits  Beneficial 

A  student  of  mercantile  credits  should  have  a  general 
knowledge  of  the  principles  and  methods  which  apply  in 
managing  the  credit  department  of  a  bank.  A  knowledge 
of  banking  details  and  practice  is  an  aid  in  the  conduct  of 
a  mercantile  credit  department.  Some  authorities  hold 
that  such  information  is  essential. 

It  may  be  also  that  a  student  of  mercantile  credits  will 
desire  to  enter  the  credit  department  of  a  bank.  In  such 
a  case  a  preliminary  study  of  banking  credits  will  prove 
to  be  of  value  in  taking  up  that  line  of  work. 

Old  Banking  System 

A  great  change  has  been  wrought  in  banking  methods 
since  the  adoption  of  the  federal  reserve  system.  Much 
that  had  been  written  concerning  bank  credits  prior  to 
that  time  is  greatly  modified  or  does  not  apply.  Not  only 
banking  methods  but  many  details  of  commercial  business 
have  been  changed  in  the  process  of  adjustment  to  the 
new  conditions  brought  about  by  the  federal  reserve  law. 

A  brief  review  of  the  old  banking  system  will  lead 
to  a  clearer  comprehension  of  these  changes.  Prior  to 
1912  the  nation  had  approximately  7,200  national  banks 
and  15,000  state  banks.  The  national  banks  were  super- 
vised by  the  Comptroller  of  the  Currency,  and  the  state 
banks  by  the  banking  department  of  each  state.  Private 
banks  had  no  supervision. 

162 


BANKING  CREDITS  163 

Currency  was  issued  either  by  the  government  against 
gold  and  silver  in  the  United  States  Treasury,  or  by  the 
national  banks  against  government  bonds  owned  by  them. 
This  system  of  currency  issue  had  no  flexibility  in  that 
the  issue  could  not  be  increased  on  short  notice  when 
business  needs  demanded  it. 

The  national  banks  in  the  three  central  reserve  cities 
of  New  York,  Chicago,  and  St.  Louis  were  required  to 
maintain  a  reserve  of  25  per  cent  of  their  deposits  in  cash 
in  their  own  vaults.  Those  in  the  reserve  cities  were 
compelled  to  carry  an  equal  reserve,  but  one-half  of  it  or 
less  could  be  in  the  form  of  deposits  in  one  of  the  central 
reserve  cities.  The  third  class  of  national  banks,  referred 
to  as  country  banks,  had  15  per  cent  of  their  deposits  for 
their  minimum  reserve  requirements,  two-fifths  or  more 
of  which  had  to  be  cash  in  their  own  vaults,  and  three- 
fifths  or  less  could  be  carried  as  deposits  in  a  central 
reserve  or  reserve  city. 

The  Crop  Moving  Problem 

The  year  was  divided  into  two  periods.  The  first  six 
months  was  the  time  of  moderate  demand  for  loans,  when 
normally  the  interest  rate  was  at  the  lowest  point.  The 
last  six  months  was  the  crop-moving  period,  when  the 
banks  were  obliged  to  reduce  their  loans  to  commercial 
borrowers  and  give  back  in  currency  to  the  interior  banks 
the  deposits  held  from  them,  and  to  some  extent  loan 
them  additional  funds  for  moving  to  market  the  cotton 
and  grain  crops.  By  January  of  the  following  year  the 
greater  part  of  the  crop-moving  currency  had  found  its 
way  back  into  the  banks  again. 

If  during  this  crop-moving  period  anything  occurred 
to  shake  public  confidence,  people  began  to  hoard  cur- 
rency and  withdraw  it  from  the  bank  deposits  at  a  time 


164  MERCANTILE  CREDITS 

when  the  supply  was  usually  only  sufficient  for  actual 
needs.  When  this  happened,  conditions  leading  to  a  panic 
were  immediately  created.  A  wild  scramble  between 
banks  was  precipitated,  each  trying  to  get  and  hold  enough 
currency  to  maintain  the  legal  cash  reserve,  which  under 
the  banking  law  was  essential  to  solvency. 

The  banks  in  the  reserve  cities  would  practically  sus- 
pend currency  payments  and  would  issue  clearing-house 
loan  certificates  in  settlement  of  balances  due  each  other. 
Employers  of  labor,  not  being  able  to  secure  currency 
from  their  banks,  would  pay  their  employees  with  checks. 
All  such  expedients  would  only  add  to  the  scare.  For- 
eign countries  would  share  in  the  alarm  and  begin  to  sell 
back  American  securities  held  abroad  and  demand  gold 
in  exchange.  When  the  foreign  creditors  were  assured 
that  this  country  was  solvent  and  that  there  was  no  cause 
for  distrust,  they  replied  that  it  was  difficult  to  maintain 
faith  in  a  currency  system  which  had  no  elasticity  to  meet 
the  crop-moving  demand,  or  in  a  credit  system  which 
broke  down  whenever  it  was  brought  under  this  strain. 
They  therefore  preferred  to  take  no  chances. 

These  business-destroying  conditions  would  prevail 
until  confidence  could  be  gradually  restored.  All  this 
time  the  banks  had  their  vaults  well  filled  with  commer- 
cial paper,  the  very  best  form  of  credit  security,  but  it 
was  not  possible  to  realize  on  it.  Business  was  tempo- 
rarily paralyzed  and  credit  largely  suspended,  while  the 
liquidation  of  credits  outstanding  was  impeded  and  losses 
greatly  increased. 

The  Federal  Reserve  System 

It  was  an  unbearable  condition,  but  no  concerted  effort 
to  provide  an  adequate  remedy  was  made  until  the  unex- 
pected panic  of  1907  roused  the  commercial  forces  of  the 


BANKING  CREDITS  165 

country  to  determined  action.  The  Aldrich  Monetary 
Commission  was  appointed  and  after  thorough  investiga- 
tion and  study  it  submitted  a  report  outlining  the  organ- 
ization of  a  new  banking  system.  On  the  basis  of  this 
report  Congress  finally  enacted  the  Federal  Reserve  law, 
which  has  proved  to  be  a  splendid  piece  of  constructive 
work,  embodying  such  an  improved  banking  system  as  the 
business  interests  of  the  country  were  demanding. 

Before  the  passage  of  the  law,  however,  it  was  found 
that  the  bankers  themselves  were  not  fully  agreed  as  to 
its  merits.  Those  who  had  advocated  the  branch  banking 
system  were  not  entirely  satisfied.  There  were  others 
who  were  in  doubt  as  to  the  danger  of  undue  inflation  of 
the  currency  which  might  result.  There  was  also  some 
doubt  as  to  how  the  new  plan  might  stand  the  strain  of 
expansion  and  governmental  financing  in  the  event  of  a 
war.  It  has  been  said  by  high  authority  that  the  most 
potent  influence  in  bringing  about  the  enactment  of  the 
law  was  the  insistent  demand  of  the  National  Association 
of  Credit  Men  and  other  commercial  bodies  which  insisted 
that  the  work  of  the  commission  should  not  go  into  the 
scrap-heap,  that  its  plan  was  workable,  and  that  the  time 
had  come  to  give  the  nation  the  relief  which  this  law 
would  afford.  As  one  leading  banker  expressed  it: 
"Without  the  support  of  the  man  on  the  street,  it  might 
not  have  been  possible  to  secure  the  enactment  of  the  law." 
At  the  present  time  it  seems  evident  that  the  bankers  are 
now  almost  unanimous  in  favoring  the  law,  and  they 
describe  the  federal  reserve  banks  as  "reservoirs  of 
credit." 

The  test  of  the  law  in  the  event  of  war  came  with 
unexpected  suddenness  and  almost  before  the  system  had 
been  brought  into  working  order.  There  may  always  be 
a  question  among  students  of  economic  and  financial  his- 


166  MERCANTILE  CREDITS 

tory  as  to  whether  there  would  have  been  a  war  had  the 
former  banking  system  of  the  United  States  been  still 
in  operation  when  the  World  War  began.  Would  it  have 
been  possible  to  finance  the  needs  of  the  nations  engaged 
in  it,  and  at  the  same  time  meet  the  requirements  of  this 
nation?  If  not,  then  the  war  would  have  been  of  short 
duration  and  doubtful  outcome.  Was  there  an  element 
of  Providence  which  brought  the  system  into  action  just 
in  time  ? 

Benefits  of  System 

The  Federal  Reserve  Act  furnishes  a  plan  for  mobiliz- 
ing the  entire  banking  capital  of  the  country  on  short 
notice.  The  united  financial  strength  of  the  country  can 
be  concentrated  at  any  weak  point  in  time  to  relieve  any 
stringency.  The  system  is  cohesive,  co-operative,  and  co- 
ordinated. Its  relation  to  the  Treasury  Department  of 
the  government  is  ideal  for  governmental  financing,  and 
at  the  outset  stood  successfully  the  greatest  test  in  this 
direction  which  it  will  ever  be  likely  to  meet.  It  went 
through  an  unparalleled  period  of  currency  inflation  with- 
out a  jar,  and  with  its  present  entire  freedom  from 
political  entanglement  or  control  it  commands  the  con- 
fidence of  the  people  to  an  extent  that  furnishes  an  al- 
most absolute  safeguard  against  panics. 

The  student  of  banking  practice  should  become 
familiar  with  the  law  in  its  entirety,  but  one  or  two  of  its 
requirements  may  be  here  mentioned : 

1.  No  federal  reserve  bank  can  be  organized  without 
at  least  $4,000,000  capital. 

2.  Member  banks  are  required  to  carry  with  their  fed- 
eral reserve  bank  as  a  reserve  7  per  cent  of  their  demand 
deposits  and  3  per  cent  of  their  time  deposits.     Reserve 
city  banks  are  required  to  carry  10  per  cent  of  their  de- 


BANKING  CREDITS  167 

mand  deposits  and  3  per  cent  of  time  deposits.  Central 
reserve  city  banks  are  required  to  carry  13  per  cent  of 
demand  deposits  and  3  per  cent  of  time  deposits. 

3.  Deposits  subject  to  call  within  thirty  days  are 
classed  as  demand  deposits,  and  those  running  for  more 
than  thirty  days  count  as  time  deposits. 

Plan  First  Suggested  by  a  Credit  Man 

The  nucleus  of  the  federal  reserve  system  as  adopted, 
was  first  suggested  by  a  credit  man,  D.  S.  Ludlum,  of  the 
Philadelphia  National  Bank  of  Philadelphia,  in  an  article 
published  in  1908.  He  based  his  plan  on  the  relief  offered 
during  the  panic  of  1907,  by  clearing  house  loan  cer- 
tificates, and  proposed  to  divide  the  country  into  ten  or 
twelve  clearing  house  districts.  Every  bank  was  to  be- 
come a  member  of  the  clearing  house  for  its  district.  In 
case  of  a  currency  panic  each  bank  was  to  have  the 
privilege  of  depositing  commercial  paper  with  the  district 
clearing  house  as  security  on  which  it  would  receive 
clearing  house  loan  certificates,  and  these  certificates  were 
to  be  used  as  currency.  They  were  to  be  surrendered  as 
soon  as  normal  conditions  returned.  In  the  plan  finally 
adopted  district  reserve  banks  were  substituted  for  district 
clearing  houses,  and  currency  (federal  reserve  notes)  was 
issued  instead  of  clearing  house  certificates,  the  com- 
mercial paper  being  used  as  rediscounts,  or  for  col- 
lateral, according  to  circumstances. 

Relation  of  Banks  to  Credit 

It  was  always  held  to  be  a  cardinal  principle  that 
banks  are  the  keystone  in  the  arch  of  mercantile  credit. 
The  successful  operation  of  the  federal  banking  system 
demonstrated  the  truth  of  this  claim.  Banks  have  been 
called  the  custodians  of  credit.  When  banking  credits 


i68  MERCANTILE  CREDITS 

are  sound  and  reliable,  the  rate  of  interest  is  stabilized, 
confidence  is  maintained,  all  business  progresses  at  a 
normal  volume,  collections  are  to  be  depended  upon, 
and  commerce  is  developed  on  a  safe  basis. 

With  this  brief  view  of  the  banking  system  as  it  is 
now  functioning  the  student  may  more  readily  grasp  the 
underlying  principles  of  bank  credits.  One  of  the 
primary  facts  to  be  considered  is  that  banks  are  mainly 
loaning  the  money  of  their  depositors.  They  therefore 
must  count  on  receiving  payment  of  their  loans  at  ma- 
turity. If,  when  loans  are  due,  the  depositors  show  no 
indications  of  needing  their  money  and  the  outlook  is 
good  for  an  easy  money  period,  a  bank  may  be  willing 
to  renew  a  loan,  but  it  is  not  under  obligations  to  do  so. 

Experience  has  shown  banks,  especially  in  the  larger 
cities,  that  it  is  not  advisable  to  loan  more  than  60  per 
cent  of  their  deposits.  This  keeps  in  hand  a  working 
margin  above  the  legal  reserve  as  a  safeguard  against 
an  unexpected  stringency.  The  banking  laws  are  very 
drastic  and  every  careful  banker  plans  to  keep  safely 
away  from  any  possibility  of  suspending  payment. 

Judging  Bank  Credits 

The  student  of  banking  credits  will  find  there  is 
not  so  much  difference  in  the  manner  of  passing  on  bank 
loans  as  compared  with  mercantile  credits.  In  both  lines 
capital,  capacity,  and  character  are  the  basic  principles. 
The  banker  adds  the  fourth  C  for  collateral,  and  he  draws 
a  finer  distinction  between  repuation  and  character. 

The  banker  also  depends  more  upon  the  signed  financial 
statement.  This  is  because  he  is  in  a  position  to  require  it. 
Unless  the  applicant  is  well  and  favorably  known,  he 
usually  cannot  obtain  the  loan  without  furnishing  such  a 
statement. 


BANKING  CREDITS  169 

When  the  statement  is  received  the  banker  can  take 
the  time  necessary  for  analyzing  and  verifying  it,  and 
if  it  seems  advisable,  he  can  send  an  auditor  from  the 
bank  to  check  the  statement  with  the  books  of  the  ap- 
plicant. This  conservative  method  of  treating  state- 
ments no  doubt  is  the  result  of  experience,  which  has 
crystallized  into  an  aphorism:  "A  man  tells  his  hopes 
to  his  banker;  he  tells  his  fears  to  his  lawyer." 

In  analyzing  a  statement  the  first  thought  is  the 
amount  of  strictly  liquid  assets,  consisting  of  cash,  ac- 
counts and  notes  receivable,  and  merchandise  and  ma- 
terial, for  these  assets  must  be  looked  to  for  repayment 
of  the  loan.  As  a  matter  of  conservatism  and  with  the 
shrinkage  in  mind  which  always  goes  with  possible 
liquidation,  the  liquid  assets  will  be  scaled  10  per  cent 
on  receivables  and  merchandise.  Unless  after  this  treat- 
ment the  quick  assets  are  still  double  the  liabilities,  in 
most  lines  of  business  the  proposed  loan  will  call  for 
closer  investigation. 

Basis  for  Bank  Loans 

The  kind  of  business  in  which  the  applicant  is  en- 
gaged will  be  considered.  A  staple  line  well  advertised 
in  the  market,  and  in  steady  demand  will  carry  less  risk 
than  special  articles  for  which  a  sale  must  be  created 
and  on  which  a  steady  volume  of  trade  is  not  yet  as- 
sured. 

The  question  will  also  arise  as  to  how  the  customer 
proposes  to  use  the  money  if  the  loan  is  granted.  Is 
it  for  pay-rolls  and  for  taking  cash  discounts  on  pur- 
chases? These  are  legitimate  objects,  as  money  so  used 
is  a  supplement  to  working  capital.  If  the  loan  is  to 
be  used  for  additions  to  factory  and  equipment,  or  for 
expanding  the  business,  it  will  not  be  a  desirable  loan 


170  MERCANTILE  CREDITS 

for  a  bank.  Such  needs  should  be  supplied  by  addi- 
tional capital.  If  the  whole  situation  does  not  up  to 
this  point,  make  the  loan  seem  desirable,  the  bank  will 
inquire  as  to  the  standing  of  the  principals.  If  they 
represent  some  financial  responsibility  personally,  the 
loan  may  be  granted  on  their  guaranty,  given  as  an 
evidence  of  good  faith  and  as  additional  security. 

Credit  Department  of  Bank 

While  the  loan  is  under  consideration  the  credit  de- 
partment will  be  making  up  a  very  complete  credit  file, 
investigating  the  character  and  experience  of  those  inter- 
ested, the  manner  in  which  trade  obligations  have  been 
met,  and  the  popularity  of  the  product  or  the  line  of 
goods  handled.  The  business  standing  and  judgment  of 
the  principals  will  be  carefully  considered.  The  average 
cash  balance  which  the  firm  has  carried  for  a  year  or 
more  will  be  tabulated.  No  strict  rule  will  be  enforced 
as  to  the  amount  of  cash  balance  which  is  required 
as  a  basis  for  loans,  but  a  firm  desiring  a  bank  line  of 
credit  for  $50,000  is  ordinarily  expected  to  carry  an 
average  cash  balance  or  deposit  of  $10,000.  It  is  good 
practice  and  good  business  judgment  with  all  borrowing 
firms  to  carry  a  liberal  bank  balance.  This  strengthens 
the  credit  of  the  firm  with  its  bank  and  eases  up  the 
mental  strain  for  the  executive  who  looks  after  the 
financing  of  the  firm's  business. 

The  investigation  by  a  bank  credit  department  will 
be  much  more  searching  and  thorough,  and  will  deal 
more  definitely  with  personality  and  ability  than  in  the 
work  of  the  mercantile  credits.  In  this  respect  the 
French  method  is  being  adopted.  Into  the  credit  file  of 
a  French  banker  (le  dossier)  goes  every  scrap  or  frag- 
ment of  information  concerning  the  personal  habits,  the 


BANKING  CREDITS  171 

social  connections,  the  relatives,  newspaper  clippings, 
and  other  details,  which  seemingly  are  unnecessary.  An 
American  writer  on  this  subject  has  recently  indicated 
that  our  bankers  are  now  following  a  similar  system, 
and  even  -extending  their  records  to  cover  the  char- 
acteristics developed  by  the  sons  of  their  customers,  who 
some  day  may  come  into  control  of  the  business. 

Analyzing  the  Bank  Credit  File 

The  customer  seeking  a  bank  loan  will  be  expected 
to  pay  the  same  at  maturity,  and  the  credit  department 
will  seek  definite  information  on  this  point.  It  will  also 
endeavor  to  learn  whether  there  is  a  reasonable  expecta- 
tion that  he  can  do  so.  Every  bank  loan  should  be  paid 
up  within  the  year,  and  good  banking  practice  requires 
that  such  loans  should  be  paid  out  in  from  six  to  eight 
months.  This  is  necessary  in  order  that  the  assets  of 
the  bank  may  be  kept  properly  liquid. 

The  investigation  will  also  ascertain  whether  the  ap- 
plicant has  a  borrowing  account  at  other  banks.  If  so, 
is  a  proportionate  cash  balance  carried  on  deposit  with 
the  other  banks,  and  will  they  continue  the  line  of  banking 
credit  they  are  extending,  or  are  they  planning  to  restrict 
or  discontinue  it?  If  granting  the  loan  asked  is  to  be 
merely  a  part  of  a  plan  for  changing  banks,  it  may  not  be 
considered  further. 

Another  point  will  be  considered :  Is  this  customer  sell- 
ing his  own  paper  through  note-brokers,  and  to  what 
extent?  This  is  a  method  of  expanding  his  credit,  and 
notes  placed  in  that  way  must  be  paid  at  maturity  even 
though  the  maker  is  obliged  to  ask  a  renewal  at  his  bank. 
There  is  no  obligation  to  renew  on  the  part  of  the  broker, 
This  factor  will  have  a  very  definite  effect  on  the  decision. 

The  applicant  will  also  be  asked  whether  he  is  dis- 


172  MERCANTILE  CREDITS 

counting  his  bills  receivable  and  to  what  extent,  as  this 
creates  contingent  liability  under  his  indorsement  of  such 
paper,  and  is  using  up  that  part  of  his  assets  in  advance 
of  maturity,  for  obtaining  working  capital. 

With  regular  customers  the  credit  department  of  a 
bank  compiles  a  comparative  analysis  of  the  financial 
statements  of  those  who  are  borrowing  customers.  This 
shows  from  year  to  year  the  fluctuations  in  assets  and 
liabilities,  and  the  increase  or  decrease  of  working  capital. 
This  comparison  is  a  barometer  test  of  the  business,  and  if 
healthy  growth  is  not  maintained,  or  the  firm  seems  to  be 
going  backward  by  this  showing,  the  matter  is  taken  up 
with  the  borrower  for  an  explanation. 

In  banking  practice  the  credit  department  does  not 
pass  on  loans.  It  is  in  a  way  the  statistical  or  information 
department  obtaining  the  facts  on  which  the  authorized 
executives  decide  as  to  lines  of  credit  to  be  extended.  In 
smaller  banks  the  executive  who  fixes  the  line  of  banking 
credit  to  be  given  may  also  supervise  the  work  of  securing 
credit  information  and  keeping  credit  files  revised. 

Fixed  Assets  in  Property  Statement 

In  analyzing  the  property  statements  of  manufactur- 
ing firms  the  banker  will  usually  find  the  item  of  fixed 
assets  consisting  of  real  estate,  buildings,  and  equipment. 
This  item  is  not  considered  in  determining  the  loan,  as  at 
that  time  only  liquid  assets  are  sought  for,  and  the  banker 
does  not  expect  to  rely  upon  the  manufacturing  plant  for 
the  payment  of  the  loan.  This  asset  has  a  bearing,  how- 
ever, on  the  situation  as  a  whole.  Is  it  clear  of  encum- 
brance? If  so,  a  long-term  loan  might  be  obtained  on  it 
in  case  some  unexpected  condition  developed. 

How  much  of  the  firm's  capital  is  invested  in  this 
asset?  If  all  or  nearly  all  has  been  absorbed  in  this  way, 


BANKING  CREDITS  173 

the  investment  is  out  of  proportion  and  the  firm  must 
borrow  all  or  nearly  all  its  working  capital.  This  is  not 
favorable  for  a  banking  loan.  The  fixed  asset  investment 
should  only  be  large  enough  adequately  to  care  for  the 
volume  of  business  undertaken  and  leave  a  safe  propor- 
tion for  conducting  that  business. 

Banker  Advising  Customer 

Bankers  always  desire  to  sustain  close  confidential 
relations  with  their  customers  and  to  know  what  changes 
are  being  considered,  if  any,  in  their  policies  or  conduct 
of  the  business.  Very  frequently  they  can  give  good 
advice.  An  experienced  banker  in  discussing  this  phase 
of  banking,  says :  "Use  your  banker  in  every  way  possible, 
especially  for  suggestions.  He  will  appreciate  it  and  you 
will  be  greatly  benefited." 

It  has  been  said  that  bankers  are  often  the  best  mer- 
chants. Every  business  man  is  experienced  and  well 
posted  in  his  own  line,  but  the  banker  in  making  loans 
in  a  community  or  market  must  be  well  informed  con- 
cerning every  line  to  which  he  extends  banking  credit. 

Purchase  of  Commercial  Paper 

Nearly  every  bank,  in  large  as  well  as  small  towns, 
buys  commercial  paper  at  certain  seasons  of  the  year.  In 
so  doing  they  are  investing  on  short  maturities  any  sur- 
plus funds  not  in  immediate  demand  by  regular  customers. 
This  keeps  idle  funds  in  temporary  use,  and  in  buying 
such  paper  from  note-brokers  the  bank  selects  the  ma- 
turity dates  which  will  bring  the  money  back  at  the  time 
when  it  will  be  required  for  regular  demand.  Such  paper 
is  usually  bought  on  ten  days'  approval,  and  it  is  the  work 
of  the  credit  department  to  make  up  a  credit  file  on  each 
piece  of  paper  handled.  This  investigation  is  made  very 


174  MERCANTILE  CREDITS 

searching,  as  the  bank  does  not  need  to,  and  will  not,  take 
any  chances  whatever  on  this  form  of  investment. 

Modern  banks  usually  have  a  bond  and  stock  account 
in  which  their  own  funds  may  be  invested.  This  form  of 
credit  as  well  as  the  handling  of  foreign  bills  of  exchange 
comes  under  the  management  of  executives  who  are  ex- 
perienced and  expert  in  these  departments. 

Skill  Required  in  Banking  Credits 

An  experienced  banker  has  briefly  summarized  bank- 
ing credit  in  this  way: 

There  are  no  fixed  rules  or  infallible  tests  as  to  the  granting 
of  credits.  It  is,  of  course,  essential  that  the  borrower  shall  have 
a  good  business  reputation,  that  he  give  evidence  of  his  capacity 
to  conduct  his  business  efficiently,  and  that  he  have  sufficient  re- 
sources of  his  own,  so  that  his  borrowings  may  be  only  for  his 
current  needs.  The  use  of  bank  credit  is  merely  a  means  by 
which  borrowers  and  lenders  are  brought  together,  the  bank  being 
the  intermediary. 

The  granting  of  bank  credits  requires  the  very  highest 
order  of  ability  and  financial  judgment.  The  vast  sums 
of  depositors'  money  loaned  through  the  banks  in  the 
course  of  a  year  must  be  handled  with  little  or  no  loss. 
The  banker,  in  extending  these  loans,  must  forecast  the 
future  not  only  as  to  the  probable  trend  of  the  money 
market  and  general  business  conditions,  but  also  as  to  the 
influences  and  probabilities  affecting  the  particular  busi- 
ness of  the  firm  requiring  the  loan.  He  must  guard 
against  unexpected  contingencies  so  far  as  possible.  This 
requires  sagacity,  experience,  keenness  of  power  to  ana- 
lyze, and  an  almost  unerring  judgment  as  to  causes  that 
are  becoming  operative  and  their  probable  effect  during 
the  year  to  come.  Forecasting  the  future  intelligently 
and  accurately  is  a  banker's  most  important  problem. 


CHAPTER  XV 
RETAIL  AND  INSTALMENT  CREDITS 

Concerns  Extending  the  Credits 

This  field  of  credit-granting  covers  a  wide  range  of 
business.  There  are  two  general  classes  of  houses  ex- 
tending these  two  kinds  of  credit :  ( I )  department  stores 
and  those  which  sell  entirely  on  the  instalment  plan,  the 
large  retail  houses  in  the  larger  cities  coming  under  the 
classification  of  department  stores;  (2)  general  merchan- 
dise stores  and  concerns  doing  a  retail  business. 

The  department  stores  and  those  selling  on  instalments 
have  as  a  rule  organized  credit  departments.  In  the 
smaller  retail  houses  credits  are  passed  upon  by  the 
proprietor.  The  student  of  credits  will  be  more  directly 
interested  in  retail  credits  as  handled  by  a  credit  depart- 
ment. 

Credit  Manager  Also  a  Salesman 

The  same  principles  which  govern  in  wholesale  credits 
will  apply  in  retail  merchandising  in  a  general  way,  but 
the  information  on  which  the  credit  is  based  is  obtained 
from  other  sources,  and  the  details  and  methods  will 
involve  a  very  different  policy  and  manner  of  handling. 

In  a  retail  house  the  credit  department  will  give  more 
attention  to  increasing  sales,  and  will  work  in  more  direct 
co-operation  with  the  sales  department.  The  increase  of 
sales  will  result  chiefly  from  increasing  the  number  of 
customers  having  charge  accounts. 

175 


176  MERCANTILE  CREDITS 

If  the  volume  of  sales  can  be  doubled  in  a  retail  busi- 
ness without  increasing  the  losses,  the  profit  of  the  house 
will  be  greatly  increased.  A  psychological  influence  is 
invoked  through  increasing  the  volume  of  credit  business. 
A  customer  who  buys  only  for  cash  will  be  a  shopper, 
going  from  place  to  place  and  finally  buying  where  the 
best  bargain  seems  to  offer.  The  customer  with  an  ac- 
count will  be  very  apt  to  go  to  the  store  or  stores  where 
the  purchases  will  be  charged.  It  has  also  been  demon- 
strated that  the  charge  customers  will  buy  more  liberally 
than  if  currency  is  being  paid  out  on  each  purchase. 

There  is  a  saving  of  time  with  the  charge  account.  As 
soon  as  the  sale  is  recorded  the  customer  goes  on  to  visit 
the  next  department.  There  is  no  waiting  for  change.  If 
it  is  desired  to  have  the  goods  purchased  sent  for  inspec- 
tion and  approval  at  home,  this  can  be  done  without  the 
inconvenience  of  depositing  the  purchase  price  in  cash. 
The  charge  account  offers  various  inducements  for  in- 
creasing the  volume  of  purchases. 

Encouraging  Charge  Accounts 

There  are  three  ways  in  which  such  accounts  are 
obtained.  In  the  first,  the  sales  and  credit  departments 
working  together  are  constantly  preparing  lists  of  people 
who  may  be  desirable  charge  customers,  and  when  a  name 
goes  on  the  list  the  credit  standing  of  the  person  is  inves- 
tigated. If  found  satisfactory  an  invitation  is  extended  to 
open  a  credit  account  with  the  house  and  this  is  followed 
up  until  the  arrangement  is  made,  or  until  it  seems  evident 
that  the  account  is  not  desired. 

The  second  method  of  obtaining  charge  accounts  is 
where  customers  apply  for  such  accounts.  This  also  gives 
the  credit  department  opportunity  for  investigation  in 
advance.  If  the  applicant  is  engaged  in  business  it  is 


RETAIL  AND  INSTALMENT  CREDITS  177 

comparatively  easy  to  learn  his  personal  standing.  If  not, 
references  are  obtained  from  him,  and  his  previous  paying 
record  ascertained.  The  specific  facts  desired  for  the 
credit  file  will  be  the  place  of  residence,  the  position  he 
holds,  amount  of  salary  or  income,  and  the  character  and 
extent  of  his  property  resources,  name  of  his  bank  and 
the  average  balance  carried.  Also  does  he  have  charge 
accounts  with  other  houses? 

Methods  of  Obtaining  Information 

A  good  credit  authority  commenting  on  the  manner  of 
obtaining  retail  credit  information,  says :  "It  is  somewhat 
surprising  to  learn  that  some  of  the  strongest  and  most 
influential  houses  in  the  larger  cities  will  seek  data  on 
credits  from  janitors  of  flat  buildings  and  apartments, 
from  butchers  and  from  small  trades  people  generally." 

When  such  facts  as  the  above  are  to  be  obtained  from 
a  woman  customer  in  a  personal  interview,  the  credit 
manager  should  assume  a  pleasant,  matter-of-course 
manner,  implying  that  these  are  customary  questions  asked 
of  everybody  and  while  they  are  being  answered  he  is 
alert  and  studying  the  applicant  as  well  as  the  answers 
carefully  for  any  contradiction,  discrepancy,  or  other 
unfavorable  symptom.  Such  an  interview  is  dreaded  by 
the  average  woman  who  looks  upon  it  as  an  unpleasant 
or  unnecessary  ordeal.  If  the  matter  is  handled  diplo- 
matically, she  may  be  made  to  feel  that  her  standing  is 
well  and  favorably  known,  that  the  questions  are  merely 
a  matter  of  form,  and  that  the  house  is  pleased  at  having 
secured  her  patronage.  The  interview  closes,  leaving  her 
somewhat  flattered  and  relieved  at  the  outcome.  Such  a 
customer  will  be  more  easily  held,  as  her  goodwill  is 
secured  at  the  start. 

In  the  third  method  of  getting  charge  accounts  a  cus- 


178  MERCANTILE  CREDITS 

tomer  enters  the  store,  makes  a  purchase,  and  for  the  first 
time  says:  "Charge  it."  The  checking  clerk,  not  finding 
the  name  on  the  credit  account  list  (copy  of  which  by 
card  system  is  in  every  department),  the  purchaser  is  at 
once  taken  to  the  credit  manager's  desk. 

Such  cases  will  prove  to  be  the  most  difficult  for  him. 
In  a  very  brief  interview,  without  embarrassing  the  cus- 
tomer, he  must  secure  enough  facts  on  which  to  decide 
the  credit  pending  and  enough  information  if  possible 
on  which  to  make  up  a  credit  file  before  the  next  purchase 
is  made.  He  tries  to  make  the  customer  feel  that  the 
house  is  pleased  to  have  the  opportunity  to  secure  the 
account,  and  on  investigation  the  account  may  prove  to  be 
very  desirable.  This  first  purchase  therefore  may  be 
passed  on  very  meager  information  rather  than  take  the 
change  of  offending  an  excellent  prospective  customer. 

There  will  be  cases  where  a  customer  does  not  have 
a  record  justifying  the  credit,  but  who  can  be  induced  to 
give  a  good  indorser  or  other  security. 

Qualifications  of  Retail  Credit  Man 

A  high  authority  on  credits  expresses  the  opinion  that 
"passing  on  personal  or  individual  retail  credits  is  the 
most  onerous  of  credit  tasks." 

The  retail  credit  manager  therefore  must  train  himself 
to  be  an  expert  judge  of  human  nature,  to  read  character 
quickly  and  accurately,  and  must  develop  the  faculty  of 
keeping  in  mind  the  personal  characteristics  and  prefer- 
ences of  every  customer.  Accounts  must  be  watched  very 
closely.  If  an  account  runs  over  the  end  of  the  month  the 
manager  must  supply  in  his  mind  the  reason  why.  At  the 
time  the  account  was  opened  the  time  of  payment  was 
fixed  as  the  loth  day  of  the  following  month.  This 
customer  may  be  in  Europe,  Florida,  or  California  for  a 


RETAIL  AND  INSTALMENT  CREDITS  179 

vacation,  and  it  will  be  paid  in  due  time.  Or  the  account 
may  need  immediate  attention.  He  must  know  in  which 
class  it  belongs. 

Collection  of  Accounts 

Retail  accounts  must  be  watched  more  closely  than  in 
wholesale  credits.  Unless  the  customer  is  of  unquestioned 
standing,  a  limit  is  fixed  on  every  account.  This  limit 
may  be  changed  or  raised  more  than  once  in  any  month, 
but  the  change  cannot  be  made  without  the  notice  and 
consent  of  the  credit  manager.  In  the  collecting  of  such 
accounts,  good  judgment  and  discretion  are  required.  In 
some  houses  a  second  statement  is  mailed  on  the  fifteenth 
of  each  month  for  all  unpaid  accounts  unless  they  are 
known  to  be  gilt-edged.  The  ledger  will  show  whether 
statements  are  to  be  mailed  to  the  business  address  or  to 
the  residence  of  the  customer.  Many  customers  have  a 
decided  preference  on  this  point  which  must  be  respected. 

If  accounts  go  beyond  the  I5th  of  the  month  following 
with  no  explanation  and  no  known  reason  for  non-pay- 
ment, then  either  a  courteous  letter  is  written  suggesting 
payment,  or  it  may  be  given  to  a  discreet  collector  for  an 
interview.  Neither  of  these  plans  is  followed  without 
careful  consideration  because  customers  are  naturally 
sensitive  and  resent  anything  taking  the  form  of  a  "dun/* 
whether  by  mail  or  in  person. 

Suing  a  retail  account  is  a  last  resort,  as  no  house  is 
willing  to  take  any  chance  on  being  considered  as  exacting 
or  hasty  in  collecting  its  accounts  or  suing  its  patrons. 

The  retail  credit  manager  comes  into  personal  contact 
with  a  larger  proportion  of  the  customers  than  is  possible 
in  wholesale  credits,  and  he  has  therefore  greater  respon- 
sibility in  keeping  customers  satisfied.  He  can  do  this 
more  successfully  if  he  is  in  charge  of  the  cashier,  the 


i8o  MERCANTILE  CREDITS 

accounting  and  employing  departments,  shipping,  and 
complaints.  Avoiding  dissatisfaction  is  a  sure  method  of 
increasing  sales. 

Credit  Losses  of  Small  Retail  Stores 

The  student  of  credits  will  find  a  separate  and  distinct 
problem  in  considering  the  small  retail  stores,  all  of  which 
have  charge  accounts  in  considerable  volume,  but  have  no 
credit  departments.  Such  credits  are  moral  risks  to  a 
great  extent.  They  are  given  to  a  very  large  number  of 
people.  It  is  difficult  to  classify  them ;  very  few  cases  are 
alike.  The  losses  resulting  from  such  credits  fall  heavily 
on  the  small  merchants,  who  are  least  able  to  bear  them. 
If  they  give  way  under  the  burden,  the  loss  is  passed  on 
to  the  jobbers  or  manufacturers  who  gave  them  credit. 

In  summing  up  the  losses  to  the  nation  from  bad  debts, 
statisticians  take  the  figures  of  the  rated  wholesale  and 
manufacturing  firms  which  fail  and  leave  their  creditors 
to  share  their  losses.  They  stop  there.  What  would  be 
the  aggregate  if  to  that  great  total  should  be  added  the 
bad  debts  sustained  by  the  small  retail  merchants  who 
stand  this  loss  themselves,  and  get  through  without 
failure.  Would  this  loss,  if  it  could  be  definitely  ascer- 
tained, double  the  figures  compiled  by  the  mercantile 
agencies  ?  It  can  only  be  a  matter  of  speculation,  but  as 
a  matter  of  economics,  in  so  far  as  this  loss  is  an  indirect 
tax  on  business  and  is  shifted  to  the  consumers  who  do 
meet  their  obligations,  it  is  a  part  of  the  equation  of 
retail  credits. 

Lack  of  Ability  and  Courage 

This  loss  results  in  great  part  from  the  fact  that  retail 
merchants  are  not  intelligent  in  granting  credits.  This  is 
because  they  have  no  facilities  for  training  in  this  depart- 


RETAIL  AND  INSTALMENT  CREDITS  181 

ment  of  their  business,  nor  for  obtaining  information 
concerning  the  customers  asking  credit. 

A  lack  of  business  courage  may  be  the  underlying 
fault.  They  fear  that  they  may  lose  trade  if  they  ask 
perfectly  legitimate  questions  of  the  customer  concerning 
information  they  are  entitled  to  have  before  extending 
credit.  They  refrain  from  asking,  grant  the  credit,  and 
regret  afterwards. 

They  are  afraid  their  competitor  down  the  street  will 
get  the  business.  The  desire  to  increase  volume — do  more 
business — blinds  their  judgment  and  they  take  a  chance. 

The  solution  of  the  difficulty  is  to  educate  the  retail 
merchant  and  get  him  to  substitute  co-operation  for  com- 
petition. This  is  being  accomplished  by  the  organization 
of  business  men's  associations  in  the  smaller  towns,  with 
bureaus  for  interchange  of  ledger  information  on  cus- 
tomers. This  plan  of  organization  should  be  made  more 
general.  The  retail  merchant  must  be  educated  also  to 
see  that  he  should  extend  credit  only  to  those  who  are 
surely  able  to  meet  their  obligations  promptly.  Unless 
they  do  so,  how  will  he  be  able  to  meet  his  own  payments  ? 

Instalment  Credits — A  Growing  Business 

In  the  field  of  instalment  credits  the  problems  of 
credit-granting  are  much  the  same  as  to  the  principles 
involved  and  the  methods  of  obtaining  information,  as  in 
retail  credits.  The  differences  to  be  noted  are  mainly 
these:  The  customers  are  secured  chiefly  through  adver- 
tising, and  therefore  every  purchaser  who  enters  the  store 
has  cost  the  firm  a  certain  outlay,  figured  in  the  adver- 
tising account.  Unless  he  is  sold,  the  firm  probably  does 
not  get  another  chance  at  him.  The  credit  department 
therefore  is  an  auxiliary  to  the  sales  department  to  a 
greater  degree  than  in  retail  credits. 


182  MERCANTILE  CREDITS 

It  was  once  considered  that  a  customer  bought  on  the 
instalment  plan  because  he  could  not  obtain  credit  else- 
where or  on  any  other  basis.  As  this  plan  of  merchan- 
dising has  come  to  occupy  a  larger  field,  that  view  no 
longer  obtains.  A  customer  may  have  a  good-sized  de- 
posit in  a  savings  bank  against  which  he  does  not  wish 
to  draw  until  after  the  next  interest  period.  Or  he  may  be 
a  man  with  a  good  salary  or  other  income,  but  for  special 
reasons  wishes  to  distribute  the  outlay  over  a  certain  time. 
Also  the  payment  down  of  part  cash  is  a  distinctive 
feature  which  may  vary  according  to  circumstances. 

Character  of  Patrons 

Three  classes  of  customers  will  be  found  in  those  who 
apply  for  credit: 

1.  Those  who  are  entirely  responsible.    This  class  pre- 

sents no  difficulty  in  passing  the  credit. 

2.  Those  who  are  of  good  intentions,  but  who  in  making 

the  selection  of  the  merchandise  offered  are  tempted 
to  buy  more  expensive  goods  or  in  larger  amount 
than  their  circumstances  will  justify.  Their  desires 
get  the  better  of  their  judgment.  Intelligent 
co-operation  of  sales  and  credit  departments  becomes 
necessary  in  such  cases. 

3.  Those  who  buy  without  intending  to  pay.    This  class 

fortunately  is  relatively  small,  but  always  a  danger, 
always  more  difficult  to  handle  and  frequently  not 
so  easily  detected.  Sometimes  they  are  easily 
discovered  because  they  are  amateurs  and  betray 
themselves  unconsciously  through  awkwardness. 
But  if  they  are  experienced  professionals,  the  fact 
may  not  be  discovered  till  too  late.  They  are  an 
incidental  risk  of  the  business.  In  any  suspicious 
case  the  policy  of  making  the  cash  down  part  of 
payment  as  large  as  possible  may  help  to  decide. 


RETAIL  AND  INSTALMENT  CREDITS  183 

The  man  who  passes  upon  instalment  credits  must  be 
a  reader  of  men  and  a  judge  of  human  nature,  for  his 
decisions  must  be  made  on  short  notice,  in  many  cases 
without  opportunity  to  make  detailed  investigation.  He 
must  be  quick  in  analysis  of  the  information  obtained  in 
the  first  interview,  and  he  must  avail  himself  of  the  judg- 
ment which  the  salesman  may  have  formed  in  going 
through  the  details  of  making  the  sale.  The  sales  and 
credit  departments  in  this  line  must  both  collaborate  and 
co-operate. 

In  this  class  of  credits  the  credit  manager  has  one 
resource  not  often  used  in  other  lines  of  credit,  viz.,  a 
lien  on  the  goods  sold.  Yet  it  is  a  remedy  of  which  he 
does  not  ever  wish  to  avail  himself,  except  as  a  last  resort. 
He  wishes  to  avoid  always  the  necessity  of  taking  back 
the  goods,  for  in  nearly  every  case  this  means  a  loss 
through  depreciation. 

Importance  of  Good  Collections 

The  collection  system  in  instalment  credits  becomes 
possibly  the  most  important  feature.  A  doubtful  credit 
may  sometime  be  passed  and  the  collector  of  the  territory 
instructed  to  keep  close  watch  of  it. 

A  collector  calls  for  every  instalment  the  day  it  is 
due  and  is  insistent  as  to  payment.  Only  a  very  legiti- 
mate reason  for  non-payment  will  secure  a  consideration, 
and  only  the  credit  manager  or  head  of  the  collection 
department  decides  as  to  whether  any  extension  may  be 
granted.  Prompt  collections  have  the  same  or  greater 
importance  in  this  line  of  business.  They  provide  the 
funds  for  the  conduct  of  the  business ;  they  may  increase 
sales,  for  even  a  good  customer,  if  behind  on  payments 
and  needing  additional  merchandise,  would  probably  go 
to  another  house  for  it ;  while  any  one  payment  in  default 


184  MERCANTILE  CREDITS 

may  throw  all  the  later  instalments  behind.  If  instal- 
ments once  begin  to  lap  overdue,  there  is  great  danger 
at  once  of  a  default  which  can  only  be  adjusted  by  fore- 
closure. The  daily  reports  of  collectors  and  wise  decisions 
concerning  all  overdue  instalments  therefore  are  very 
important. 


CHAPTER  XVI 

FOREIGN   CREDITS 

Selling  and  Credit  Allied 

This  branch  of  mercantile  credits  will  have  a  con- 
stantly increasing  importance  to  the  student  as  the 
United  States  continues  to  develop  its  export  trade.  The 
great  growth  of  population  will  make  it  necessary  for 
this  nation  to  find  a  foreign  market  for  its  manufac- 
tured products  in  order  to  keep  labor  employed.  The 
problem  of  securing  foreign  trade  while  paying  a  higher 
rate  of  wage  than  prevails  in  any  other  country  is  more 
properly  a  question  of  economics. 

Without  export  trade,  however,  there  is  little  in- 
centive to  the  study  of  foreign  credit  conditions.  The 
two  are  so  closely  connected  in  matters  of  detail  that  the 
study  of  one  involves  the  other.  The  subject  is  here  pre- 
sented in  a  general  way,  giving  only  suggestions  as  to 
what  is  involved  in  foreign  credit-granting.  The  con- 
crete study  of  the  proposition  will  vary  according  to  the 
country  or  countries  in  which  sales  are  made,  the  char- 
acter of  the  goods  sold,  and  the  terms  which  the  export- 
ing house  is  willing  to  grant 

Cash  With  Order  and  Long-Term  Credits 

In  the  past  the  greater  part  of  the  foreign  shipments 
from  the  United  States  has  been  paid  for  before  the 
goods  left  the  country.  On  this  class  of  shipments  no 
real  question  of  credit  arises.  The  foreign  buyer  de- 

185 


186  MERCANTILE  CREDITS 

posits  funds  in  a  bank  in  this  country  at  the  port  of  ship- 
ment subject  to  the  draft  of  the  seller  when  accompanied 
by  proper  bill  of  lading  and  other  documents.  Such  sales 
are  practically  for  cash  with  order.  The  American  manu- 
facturer has  enjoyed  such  a  volume  of  domestic  demand 
that  he  has  not  really  sought  for  foreign  trade  in  a  large 
volume  and  in  competition  with  other  countries.  The  for- 
eign buyer  will  purchase  here  on  the  cash  basis  only  while 
or  when  he  is  unable  to  obtain  the  goods  elsewhere. 
When  the  United  States  begins  to  go  after  export  trade 
in  earnest,  then  the  longer  terms  will  have  to  be  granted, 
and  foreign  credits  will  receive  the  same  careful  treat- 
ment and  investigation  as  is  now  given  to  domestic 
mercantile  credits. 

For  a  great  many  years  manufacturers  in  certain  lines 
have  been  obtaining  foreign  business  on  long-term  credits. 
They  either  sent  representatives  abroad  who  secured  the 
business  by  making  satisfactory  terms  of  payment,  or 
representatives  of  foreign  houses  came  to  this  country 
and  concluded  arrangements  in  a  way  to  satisfy  credit  re- 
quirements. 

The  United  States  has  awakened  to  the  fact  that  for- 
eign trade  in  volume  can  be  secured  only  by  giving  satis- 
factory credit  terms  and  the  facilities  for  doing  so  have 
been  provided  for  in  different  forms  of  legislation. 

Improved  Facilities  under  Federal  Reserve  Act 

The  provision  in  the  Federal  Reserve  Act  permitting 
national  banks  to  accept  drafts  on  behalf  of  their  cus- 
tomers and  the  foreign  buyers,  thus  creating  the  bankers' 
bill  of  exchange,  was  the  first  step  towards  establishing  an 
exchange  market  in  this  country  as  an  aid  to  financing 
foreign  trade. 

The  act  also  provides  that  any  national  banking  as- 


FOREIGN  CREDITS  187 

sociation  having  a  capital  and  surplus  of  $1,000,000  or 
more  may,  with  the  approval  of  the  Federal  Reserve 
Board,  establish  branch  banks  in  foreign  countries  and 
in  dependencies  of  the  United  States.  Prior  to  that  ar- 
rangement the  financing  of  our  export  trade  was  done 
mostly  by  English  banking  houses  in  pounds  sterling. 

In  1916  the  Federal  Reserve  Act  was  amended  to  per- 
mit national  banks  to  co-operate  in  the  ownership  of 
American  banks  or  corporations  principally  engaged  in 
foreign  banking,  by  investing  not  to  exceed  10  per  cent 
of  their  capital  and  surplus  in  such  enterprises.  Banks  of 
this  class  have  been  organized  to  finance  the  export  trade 
of  the  country. 

Other  Helpful  Legislation 

In  September,  1919,  a  law  known  as  the  "McLean 
Bill"  became  effective.  It  permits  national  banks  to  invest 
5  per  cent  of  their  capital  and  surplus  in  corporations 
formed  to  aid  in  financing  foreign  trade. 

On  December  24,  1919,  a  law  designated  as  the  "Edge 
Act"  went  into  effect.  Its  purpose  is  to  finance  export 
trade  on  long-time  credits  through  a  federal  incorporation 
of  banking  institutions  to  engage  in  foreign  banking.  In 
a  dependency  of  the  United  States  the  incorporation  may 
have  the  ownership  or  control  of  the  local  banking  institu- 
tions established.  Banks  under  this  law  may  not  become 
members  of  the  federal  reserve  system,  and  are  not  al- 
lowed to  invest  more  than  10  per  cent  of  their  resources 
in  any  other  than  a  banking  corporation.  They  may  not 
receive  deposits  in  the  United  States  except  for  the  pur- 
pose of  export  trade  transactions. 

This  act  contemplates  two  classes  of  corporations :  one 
class  does  principally  a  foreign  trade  banking  business; 
the  other  class  does  an  investment  business,  taking  long- 


188  MERCANTILE  CREDITS 

term  paper,  including  bonds  and  mortgages,  which  are  ac- 
ceptable in  form  and  security  to  the  Federal  Reserve 
Board,  and  issuing  their  own  short-term  debenture  notes 
against  these  securities.  These  debenture  notes  are  sold 
in  the  investment  market  and  out  of  the  proceeds  the 
American  exporter  is  paid. 

In  this  way  the  private  capital  of  American  investors 
promotes  and  finances  export  trade.  Under  the  above 
laws  there  have  been  organized  the  American  Foreign 
Banking  Corporation  of  New  York,  the  First  Federal 
Foreign  Banking  Association  of  New  York,  the  First  Na- 
tional Corporation  of  Boston,  the  Asia  Banking  Corpora- 
tion of  New  York,  and  others. 

Attention  to  Details 

The  details  of  foreign  credits  will  seem  complicated  to 
the  student  at  the  beginning.  It  will  involve  special  study 
for  each  country,  and  will  be  mastered  through  experi- 
ence. Certain  general  principles  resulting  from  experi- 
ence are  these: 

No  foreign  order  should  be  shipped  on  time  credit  to 
any  country  without  favorable  and  absolutely  authentic 
information.  A  positive  order  that  comes  unsolicited  for 
immediate  shipment  is  always  open  to  suspicion  and  must 
be  carefully  investigated.  All  C.  O.  D.  shipments  are 
unsafe  because  of  the  distance  and  the  heavy  carrying 
charges  in  case  the  shipment  is  not  accepted  by  the  buyer. 
This  does  not  mean  that  all  foreign  buyers  are  unreliable, 
but  that  there  are  in  every  country  those  who  are  dis- 
honest and  ready  to  take  advantage.  Only  the  most 
vigilant  care  will  prevent  this  class  from  carrying  out 
their  schemes,  as  they  have  little  fear  of  punishment  and 
the  difficulties  of  forcing  collections  are  too  great. 

Terms  and  prices  must  always  be  so  positively  and 


FOREIGN  CREDITS  189 

clearly  agreed  upon  that  there  shall  be  no  chance  for  a 
misunderstanding.  In  quoting  F.  O.  B.  New  York,  the 
quotation  should  be  free  on  board  cars  New  York,  and 
give  the  buyer  no  chance  to  imagine  that  it  means  free 
on  board  vessel  in  New  York  harbor. 

There  are  two  other  abbreviations  in  common  use. 
F.  A.  S.,  or  free  along  side  vessel,  means  that  the  seller 
pays  freights  from  point  of  shipment  to  seaboard,  the 
freight  handlers,  and  lighterage  charges.  The  buyer  pays 
cost  of  loading  from  lighter  to  hold  of  vessel. 

The  quotation  C.  I.  F.  means  cost,  insurance,  and 
freight,  and  carries  the  understanding  that  the  seller  pays 
for  putting  the  merchandise  aboard  the  vessel,  takes  out 
the  insurance  policy,  arranges  the  freight  rates,  secures 
the  bill  of  lading,  and  either  pays  all  these  charges  at  time 
of  shipment  or  agrees  that  the  buyer  may  deduct  these 
items  in  remitting.  It  should  be  stipulated  that  this  quo- 
tation does  not  include  any  foreign  import  duties,  cost  of 
consular  invoices,  or  any  other  items.  In  quoting  C.  I.  F. 
prices  it  should  be  plainly  stated  that  the  marine  insurance 
policy  shall  read  "Free  of  particular  average."  Should 
the  particular  average  clause  be  covered  by  the  policy  the 
premium  rate  will  be  much  higher. 

Foreign  Credit  Information — Agency  Reports 

In  securing  credit  information  the  commercial  agency 
rating  books  of  foreign  countries  will  not  be  found  very 
reliable.  In  fact  only  a  few  are  available.  They  are  said 
to  be  not  sufficiently  comprehensive.  There  are  too  many 
omissions.  This  form  of  credit  service  is  not  so  fully 
developed  and  not  nearly  so  efficient  abroad  as  in  this 
country. 

The  best  foreign  reports  come  through  the  leading 
American  mercantile  agencies.  It  takes  some  time  in 


igo  MERCANTILE  CREDITS 

many  cases  to  obtain  a  comprehensive  reliable  report  and 
the  cost  may  be  considerable  at  times,  but  these  are  no 
doubt  always  worth  the  fee  that  is  charged.  R.  G.  Dun 
and  Company  has  about  70  foreign  branches,  and  the 
number  is  constantly  increasing.  Where  they  do  not  have 
branches  they  secure  information  through  foreign  mer- 
cantile agencies  or  correspondents. 

One  of  these  agencies  gave  considerable  attention  to 
establishing  a  branch  in  the  Empire  of  India  to  report 
all  merchants  on  the  American  plan.  The  undertaking 
encountered  great  difficulties.  In  India  merchants  fre- 
quently change  their  names.  In  some  cases  the  change 
is  made  because  of  taking  up  some  different  line  of  mer- 
chandise. Or  if  the  merchant  removes  to  another  town 
or  village  he  makes  a  change  in  name  that  he  thinks  will 
give  him  some  trade  or  advertising  advantage  in  his  new 
location.  In  some  of  the  cities  of  India  the  names  and 
numbering  of  the  streets  present  difficulties.  The  streets 
are  all  narrow  and  the  names  somewhat  indefinite.  Some 
of  the  buildings  will  bear  the  old  number  and  some  a 
new  number  in  case  any  change  in  the  method  of  num- 
bering has  occurred.  Such  an  undertaking  in  the  face  of 
these  obstacles  is  a  credit  to  American  enterprise. 

Reports  from  Banks  Reliable 

Foreign  credit  reports  from  banks  are  customary  and 
are  generally  reliable.  A  better  report  and  prompter  reply 
is  usually  secured  when  the  American  exporter  gets  his 
own  bank  to  make  the  inquiry,  as  the  foreign  bank  will 
give  more  confidential  details  of  information  when  writ- 
ing another  bank.  If  the  seller  inquires  through  one  of 
the  larger  New  York  banks  doing  a  foreign  exchange 
business,  it  may  be  found  that  this  bank  already  has  in 
its  files  up-to-date  information  on  the  firm  inquired  about. 


FOREIGN  CREDITS  191 

It  is  not  worth  while  to  ask  an  American  consul  for  credit 
information.  The  consular  service  regulations  of  the 
State  Department  do  not  permit  him  to  furnish  it. 

Property  Statement  and  Interchange  of  Information 

It  is  not  good  form  to  ask  a  foreign  buyer  for  a  signed 
financial  statement.  They  are  not  accustomed  to  doing 
this  and  they  have  yet  to  be  educated  to  this  method  of 
establishing  credit.  In  Latin-American  countries  as  well 
as  in  the  Orient  such  a  request  would  be  regarded  as  akin 
to  an  insult.  If  a  foreign  buyer  should  submit  with  an 
order  a  property  statement  unsolicited  it  would  be  a  cause 
for  suspicion  and  a  case  for  very  careful  investigation. 

Interchange  of  trade  information  with  American 
houses  doing  export  business  will  bring  desirable  results. 
One  of  these  is  the  American  Export  Company  of  New 
York.  The  foreign  credit  department  of  the  National 
Association  of  Credit  Men,  the  Philadelphia  Commercial 
Museum,  the  National  Association  of  Manufacturers,  and 
similar  organizations  have  accumulated  large  numbers  of 
files.  When  the  foreign  buyer  gives  references,  mention 
should  always  be  made  of  the  fact  that  they  are  so  given 
when  information  is  asked  for. 

Important  Features  in  Foreign  Trade 

In  all  European  countries  except  Great  Britain  the 
keeping  of  books  of  account  is  required  by  law.  The 
United  States  may  some  day  follow  this  wise  precedent. 

It  is  desirable  to  know  the  commercial  laws  and  cus- 
toms of  the  countries  in  which  the  American  seller  does 
business,  so  far  as  possible.  If  he  has  a  trade-mark,  it 
should  be  recorded  in  each  country.  Otherwise  some 
enterprising  merchant  of  that  country  may  record  it  for 
him.  In  that  case  he  pays  royalty  to  the  foreign  recorder 


J92  MERCANTILE  CREDITS 

for  the  privilege  of  selling  his  goods  there  under  his  own 
trade-mark. 

Accepted  time  drafts  are  often  held  by  foreign  bank- 
ers until  goods  have  arrived  and  are  inspected,  and  banks 
will  sometimes  store  goods  in  a  warehouse  until  the  buyer 
can  arrange  for  funds  with  which  to  pay  the  draft.  The 
foreign  banks  of  some  countries  will  take  more  chances 
in  helping  out  their  customers  in  this  way  than  is  con- 
sidered safe  practice  from  the  American  standpoint.  Dur- 
ing the  World  War  period  when  gold  was  at  a  premium 
in  South  American  countries,  the  buyer  would  frequently 
ask  the  bank  holding  draft  to  wait  until  the  premium  on 
gold  went  down.  This  is  not  good  banking  practice,  but 
an  exigency  likely  to  arise  in  foreign  credits. 

Proper  Form  of  Correspondence 

Even  when  foreign  time  credits  are  extended  only  to 
houses  that  are  supposed  to  be  entirely  solvent,  collection 
problems  will  arise  at  the  maturity  of  such  accounts.  The 
correspondence  about  such  items  should  be  the  embodi- 
ment of  diplomatic  courtesy  and  always  polite  in  the  ex- 
treme. The  customer  may  be  waiting  for  more  favorable 
exchange  rates  before  remitting.  He  considers  it  entirely 
legitimate  to  do  this.  The  seller  therefore  waits  a  rea- 
sonable time  after  maturity  before  beginning  to  suggest 
payment.  The  remittance  may  be  in  the  mail  and  delayed 
in  transit,  or  it  may  be  lost.  When  it  may  become  evident 
that  payment  is  being  unduly  delayed,  the  seller  begins 
his  campaign  for  getting  the  money.  It  will  be  proper  to 
make  a  plea  that  the  prices  at  which  the  goods  were  sold 
were  very  low  and  were  quoted  only  because  the  high 
financial  standing  of  the  buyer  was  a  guaranty  of  prompt 
payment  at  maturity. 

Or  it  may  be  mentioned  that  the  seller  is  a  manufac- 


FOREIGN  CREDITS  193 

turer,  not  a  banker;  therefore  he  must  count  on  prompt 
payment  at  maturity  in  order  to  meet  his  own  obligations. 
Also  it  may  be  in  order  to  propose  charging  interest  from 
the  day  the  account  matured.  The  foreign  bank  should  in 
all  cases  have  instructions  to  protest  drafts  not  accepted 
or  not  paid  within  the  legal  time  limit. 

Litigation  on  a  Foreign  Account 

Legal  action  on  a  foreign  account  should  always  be 
avoided,  and  resorted  to  only  when  the  size  of  the  account 
and  other  circumstances  make  it  seem  imperative.  In  such 
a  case  the  claim  should  be  forwarded  by  an  American 
attorney  who  will  attend  to  verifying  the  claim  in  proper 
form  with  the  necessary  official  certificates  as  to  the 
authority  of  the  notary  who  administered  the  oath.  He 
can  also  make  better  selection  of  the  attorney  in  the  for- 
eign country  who  is  to  handle  the  claim. 

When  an  American  creditor  puts  himself  under  the 
jurisdiction  of  the  courts  of  a  foreign  land,  he  must  be 
prepared  for  anything  that  may  happen.  He  may  be 
called  upon  at  once  to  give  a  bond  that  will  protect  the 
debtor  from  any  damage  that  may  result  to  him  from  the 
suit.  The  creditor  may  be  lucky  if  he  is  not  in  the  end 
held  for  the  full  amount  of  the  bond.  On  small  claims 
the  general  experience  indicates  that  it  is  wiser  to  call 
them  a  loss  from  the  start  and  save  trouble. 

A  prominent  American  banker  discussing  this  subject 
says:  "Litigation  is  to  be  avoided  in  South  American 
countries  above  everything  else,  for  the  expense  and 
trouble  more  than  outweigh  the  value  of  the  claim." 

In  this  discussion  of  foreign  credits  only  the  rudi- 
ments of  the  subject  can  be  given.  The  student  who 
wishes  to  pursue  the  study  will  find  several  volumes  of 
several  hundred  pages  each  which  have  been  published, 


194  MERCANTILE  CREDITS 

giving  in  much  detail  the  conditions  which  prevail  and 
the  methods  of  handling  drafts  for  different  countries. 
The  development  of  the  foreign  trade  of  the  country  will 
make  credits  a  study  of  great  interest  also  because  of 
constantly  changing  conditions. 

Credit  as  a  Factor  in  the  Foreign  Field 

It  will  be  found,  as  foreign  trade  develops,  that  credit 
is  even  a  greater  factor  in  this  field  than  in  domestic 
business.  Since  the  establishment  of  the  federal  reserve 
banking  system  and  the  enactment  of  the  supplementary 
laws  in  aid  of  financing  foreign  trade  transactions,  the 
American  exporter  has  been  placed  in  position  to  meet  the 
competition  of  other  countries  in  financing  foreign  busi- 
ness without  taxing  his  resources  to  a  greater  extent  than 
in  his  home  trade.  He  is  not  yet  fully  informed  as  to 
these  facilities  which  are  at  his  command  in  handling 
foreign  trade.  With  the  discount  market  now  being  de- 
veloped in  this  country  for  handling  foreign  bills  of  ex- 
change the  American  manufacturer  can  give  credit  and 
yet  practically  sell  for  cash  through  discounting  facilities, 
basis  for  financing  foreign  trade.  Exporters  will  find  it  much 

Practical  Advice 

A  New  York  bank  through  its  foreign  exchange  de- 
partment makes  these  suggestions  to  its  customers: 

A  reasonable  term  of  credit,  generally  speaking,  allows  thirty 
days  after  the  arrival  of  the  goods.  There  are  few  places  in  the 
world  where  merchandise  cannot  be  delivered,  under  ordinary  con- 
ditions, within  sixty  days  from  the  American  port  of  shipment. 
Therefore,  ninety  days  is  usually  considered  ample. 

In  foreign,  as  well  as  in  domestic  business,  the  most  advan- 
tageous method  for  the  buyer  is  to  purchase  on  open  account. 
This  much  sought  after  and  elastic  form  of  credit,  however, 
involves  tying  up  the  seller's  capital,  and  is  not  a  satisfactory 
basis  for  financing  foreign  trade.  Exporters  will  find  it  much 
more  satisfactory  to  draw  against  their  customers  at  sight,  or  at 


FOREIGN  CREDITS  195 

a  certain  number  of  days  after  sight,  or  at  so  many  days  after 
date  of  invoice.  The  drafts  may  be  "clean"  (without  documents 
attached),  or  duplicate  or  original  shipping  documents  may  be 
attached,  the  title  to  the  goods  then  passing  either  upon  satisfac- 
tory acceptance  of  the  draft  or  upon  its  payment.  The  draft  may 
be  for  the  face  of  the  invoice,  or  with  collection  and  interest 
charges  added,  according  to  the  terms  of  the  sale.  The  interest 
charge  includes  not  only  the  term  of  the  draft,  but  also  the  time 
that  is  likely  to  be  consumed  in  getting  back  the  proceeds  when 
it  is  paid.  A  sixty  days'  sight  draft,  for  example,  drawn  on  some 
place  which  the  mails  require  thirty  days  to  reach,  would  call  for 
120  days'  interest :  sixty  days  from  the  acceptance  date,  and  thirty 
days  each  for  the  transit  of  the  draft  from  and  to  the  point  of 
origin.  If  the  draft  is  on  some  country  where  the  rates  of  ex- 
change are  subject  to  more  or  less  fluctuation,  it  is  customary  to 
include  in  the  draft  this  clause:  "Payable  at  the  collecting  bank's 

selling  rate  for  demand  drafts  on "  (New  York  or  London, 

according  to  whether  the  draft  is  in  dollars  or  sterling).  This 
clause  prevents  the  buyer  from  fixing  his  own  rate,  which  would 
be  to  his  advantage. 

To  convert  the  draft  into  cash  as  soon  as  he  gets  the  bill  of 
lading,  the  exporter  takes  it  to  his  bank  for  discount.  This  he  will 
have  little  or  no  difficulty  in  doing  if  it  is  drawn  at  sight  and  the 
documents  are  attached,  providing,  also,  that  everything  else  is  in 
order  and  that  the  merchandise  is  of  a  kind  that  will  be  readily 
salable  if  the  buyer  should  not  pay  on  delivery. 

If  the  draft  is  payable  a  certain  number  of  days  after  accept- 
ance, the  credit  standing  of  the  acceptor  becomes  an  important 
factor  in  seeking  to  discount  the  paper.  In  such  a  case,  the  goods 
pass  into  the  buyer's  hands  before  he  pays.  Therefore,  lacking 
the  added  security  of  title  to  the  goods  until  they  are  paid  for, 
the  bank  looks  first  at  the  responsibility  of  the  exporter  and  then 
upon  the  credit  standing  of  the  importer  abroad,  if  that  can  be 
established. 

The  bank  having  agreed  to  discount  the  bill  of  exchange,  the 
exporter  receives  credit  for  its  face,  less  interest  and  collection 
charges.  The  transaction,  therefore,  is  closed,  so  far  as  he  is  con- 
cerned, practically  as  if  he  had  made  the  sale  of  the  goods  for  cash. 
He  has  received  his  money,  and  the  buyer  has  received  the  credit 
agreed  on.  In  certain  cases,  however,  the  bank  may  think  best 
to  safeguard  itself  by  advancing  the  exporter  only  a  portion  of  the 


196  MERCANTILE  CREDITS 

amount  of  the  draft— 25  or  50  per  cent,  or  more— or  it  may  not 
take  the  draft  at  all,  except  for  collection,  and  then  may  make 
its  advance  on  receiving  word  that  the  draft  has  been  accepted. 
In  these  matters,  the  credit  standing  of  the  firms  or  individuals 
involved  exert  exactly  the  same  influences  as  they  do  in  the 
financing  of  domestic  shipments. 

It  will  be  seen  that  the  foreign  buyer  must  pay  the  greater 
part  of  all  the  collection  and  interest  charges.  It  may  be  that, 
feeling  that  he  can  do  this  better  at  his  end  of  the  line,  he  will 
prefer  to  arrange  what  is  called  an  "acceptance  credit."  To  do 
this,  he  obtains  a  letter  of  credit  from  his  local  bank.  This  is 
directed  to  an  American  bank  and  authorizes  it  to  accept  drafts 
drawn  by  one  or  more  American  exporters  on  certain  terms  of 
credit,  the  shipping  documents  being  attached  to  the  bills  of  ex- 
change. In  this  case,  the  transaction  is  between  the  two  banks. 
The  American  bank  accepts  the  drafts  and  documents  and  sends 
them  to  the  foreign  bank,  which  provides  the  funds  to  cover  the 
transactions,  and  looks  to  its  own  customer  for  reimbursement. 
The  accepting  bank,  while  it  discounts  the  drafts  for  its  own 
customers,  is  protected  by  the  foreign  bank's  guaranty. 

Bank  Acceptance 

The  bank  acceptance  is  beyond  doubt  the  most  satis- 
factory method  of  financing  export  shipments,  and  it  can 
be  usually  arranged  for  without  difficulty.  The  American 
exporter,  instead  of  refusing  foreign  trade  unless  he 
receives  cash  with  the  order,  can  quote  his  price  on  the 
basis  that  his  customer  open  a  credit  in  New  York 
through  a  bank  that  is  acquainted  with  this  foreign  buyer's 
financial  responsibility.  Two  banking  commissions  may 
have  to  be  paid,  but  the  lower  rate  of  discount  commanded 
by  a  prime  acceptance,  that  is,  a  bank  acceptance,  provides 
practically  a  spot  cash  price  for  the  goods,  which  will 
more  than  offset  the  commissions. 

A  more  general  study  of  our  present  system  for  hand- 
ling this  class  of  foreign  credits  will  show  manufacturers 
the  possibilities  of  these  facilities,  and  encourage  them  to 
compete  for  a  larger  volume  of  foreign  trade. 


INDEX 


Acceptance,  bank,  196 
Accounts  due, 

handling,  no 
Accounts  overdue, 

draft  on  debtor's  bank,  116 

embarrassed  old  account,  114 

handling,  in 

interest  on,  128 

note  settlements,  113 

reasons  for,  112 

retail  stores,  179 
Accounts  payable, 

analysis  of,  on  statement,  94 
Accounts  receivable, 

analysis  of,  on  statement,  91 

sale  of,  entered  on  statement, 

96 

Advertising,  injudicious,  108 
Agencies,  commercial, 

criticism  of,  53 

financial  statement,  87 
form,  88 

foreign  credit,  189 

ratings,  50-57 

statements  obtained  by,  80 
Assets, 

fixed,  analysis  of,  on  financial 
statement,  92 

ratio  of,  to  liabilities,  97 
Attorneys,  reports,  58-60 


B 


Banking  system,  162-167 

Bankruptcy, 
acts      preventing      discharge 

from,  148 

adjustment  bureaus,  141 
administration  of  estates,  145 


B  ankruptcy — Continued 

ancillary  proceedings,  144 

Canadian  Act,  149 

causes,  146 

commissioner  of,  145 

debts  not  subject  to  law,  147 

fraud  in,  141 

law,  134-150 

National  Act,  134,  137-141 

priority  debts,  146 

state  laws,  135,  136 
Banks, 

credit,  162-174 

credit  department,  170 
analysis  of  file,  171 
analysis  of  statement,  173 
basis  for  loans,  169 
judging,  1 68 

federal  reserve,  164-167 

foreign  information,  190 

purchase  of  commercial  paper, 
173 

reports,  60-63 
Bradstreet  ratings,  50 
Bulk  sales  law,  157 


Canada, 

Bankruptcy  Act,  150 
Cancellations,  130 
Capacity, 

credit  element,  20,  23-29 
Capital, 

credit  element,  20,  22 

importance  of ,  22 

lack  of  cause  of  failure,  106 
Cash  discount,  125-128 
Character,  20,  31-39 
Charge  accounts,  retail,  176 
Checks,  defective,  119 


197 


198 


INDEX 


Chicago      Credit      Interchange 
Bureau, 

form,  66 
Claims, 

shortage  and  damage  on  ship- 
ments, 128 
Collections,    110-124 

defective  remittances,   119 

draft  on  debtor's  bank,  116 

form  letters,  115 

instalment  credits,  183 

insufficient  funds,  120 

medium  of,  117 

personal  visit,  120 

policy  in,  122 

retail  accounts,  179 

successful,  16 

unresponsive  debtors,  117 

watching  maturities,  1 10 
Collector  of  accounts, 

qualifications,  115 
Commercial       agencies        ( See 

"Agencies,  commercial") 
Commercial  paper, 

purchase  by  bank,  173 
Congress  of  Nations,  1893,  5 
Corporation,  foreign,  160 
Correspondence,  foreign  forms, 

192 
Credit, 

analyses,  89-102 
bank  credit  file,  171 

bank,  162-174 

defined,  3 

history  of,  5 

maintaining  standard  of,  42 
Credit  brief, 

form,  101 
Credit  department, 

bank,  170 

organization,  40-45 

origin  of,  4 

retail  store,  175 
Credit  man, 

authority  of,  18 

duties,  14 

experience,  10 

member  of  firm,  18 

qualifications,  7-19 

retail,  178 


Customer, 

as  a  credit  risk,  19-39 
Customers'  list,  inspection  of,  48 


Damage,  on  shipments,  128 
Departments  of  a  business, 

co-operation  between,  40-45 
Diary,  credit  man's,  72 
Discount  (See  "Cash  discount") 
Draft,  overdue  account,  116 
Dun,  R.  G.  &  Co., 

financial  statement, 
form,  86 

ratings,  50 

£ 

Economics,  study  of,  8 
Edge  Act,  187 
Equation,  credit,  20 

F 

Failures, 
causes,  103-109 
statistics,  105 
Fake  Statement  Act  of  Illinois, 

81 

Federal  reserve  banks,  164-167 
foreign  credit  provisions,  186 
Files  (See  also  "Information") 

information  in,  46 
Financial  statements, 
analysis  of,  89-102 
accounts  payable,  94 
accounts  receivable,  91 
by  banker,  172 
fixed  assets,  92 
inventory,  90 
liabilities,  94-98 
notes  payable,  94 
notes  receivable,  92 
ratio  of  assets  to  liabilities, 

97 

sale  of  accounts  receivable, 

96 

benefits  of,  80 
false.  8 1 


INDEX 


199 


Financial  statements — Continued 

foreign  customers,  191 

forms,  85-89 
agency  form,  88 
Dun's,  86 

Illinois  Act,  81 

obtaining,  73-84 
by  commercial  agencies,  80 

refusal  to  submit,  75,  83 

use  of,  79,  85 

Foreign  corporation  laws,  160 
Foreign  credit,  185-196 

bank  acceptance,  196 

bank  reports,  190 

correspondence,  192 

Federal    Reserve   Act   provi- 
sions, 186 

information,  189 

legislation,  187 

litigation,  193 

methods..  185 
Foreign  trade,  features  of,  188, 

191 

Foreigners,  as  credit  risks,  27 
Fraud,  in  bankruptcy,  143 


Illinois  Fake  Statement  Act,  81 
Incompetence,  cause  of  failure, 

107 
Information, 

attorneys'  reports,  58-60 

bank  reports,  60-63 

commercial  agency  ratings, 

S0:57 

credit  man's  diary,  72 
foreign  credit,  189 
interchange  of,  64-71,  191 

form,  66,  68,  69 
personal  interviews,  71 
retail  credit,  177 
salesmen's  reports,  46 
Instalment  credit, 
collections,  183 
problems  of,  182 
Insurance,  151-157 
Interchange  bureaus,  64-71 
form,  66,  68,  69 


Interest,  on  overdue  accounts, 

128 

Interviews,  personal,  71,  120 
Inventories, 
analysis  of,  on  statement, 

90,97 


Laws, 

bankruptcy,  134-150 

bulk  sales,  157 

conditional  sales  contract,  158 

foreign  corporations,  160 

knowledge  of,  17 

negotiable  instruments,  160 

uniform  sales,  159 
Legislation,  credit  reforms  by,  7 
Letters,  collection,  115 
Liabilities, 

analysis  of,  on  statement, 
94-98 

ratio  of  assets  to,  97 
Litigation,  foreign  account,  193 
Loans  (See  "Banks,  credit") 
Lumbermen's    Credit    Associa- 
tion, 

report  form,  68,  69 


McLean  Act,  187 

Mercantile     agencies     ( See 

"Agencies,  commercial") 
Merchandise,  returned,  129 
Misrepresented  goods,  128 

N 

National  Association  of  Credit 

Men, 

bankruptcy     adjustment     bu- 
reaus, 141 
interchange     of     information 

through,  64 
organized,  6 
Negotiable     Instruments     Law, 

160 

Nineteen-Twenty,  year  of, 
readjustment     difficulties,     9, 
108,  130 


200 


INDEX 


Notes, 

settlement     on     overdue    ac- 
count, 113 
Notes  payable, 

analysis  of,  on  statement,  94 
Notes  receivable, 

analysis  of,  on  statement,  92 


Retail  credit, 

charge  accounts,  176 

collections,  179 

losses  due  to,  180 

manager,  178 

methods   of    obtaining   infor- 
mation, 177 
Risks,  the  customer,  19-39 


Organization,  40-45 
P 

Partners,  number  of,  26 
Past-due    account     (See    "Ac- 
count, overdue") 
Percentage  basis  of  rating,  21 
Property  statements    (See  "Fi- 
nancial statements") 
Purchasing  department,  40 


Sales  department,  40 
Sales  laws,  157 
Salesmen, 

customers'  lists,  inspection  of, 
48 

reports,  46 
Shipments, 

shortage  and  damage  on,  128 
State  bankruptcy  laws,  135,  136 
Statements      (See     "Financial 
statements") 


Rating, 

commercial  agencies,  50-57 
percentage  basis,  21 
special  reports,  54 
Reports, 

attorneys',  58-60 
bank,  60-63,  190 
commercial  agencies,  50-57 
credit  brief, 

form,  101 
interchange  bureaus,  64-71 

forms,  66,  68,  69 
salesmen's,  46 

forms,  47 
special  rating,  54 


Trade  abuses,  125-133 
Trade  associations, 
interchange  of  information,  67 
forms,  68,  69 


u 

Uniform  sales  law,  159 
United    States    national 
ruptcy  law,  134,  137 

W 


bank- 


Will-he-pay equation,  20 
World's  Fair,  Chicago,  1893 


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